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Full text of "Russian organized crime in the United States : hearing before the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, United States Senate, One Hundred Fourth Congress, second session, May 15, 1996"

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S.  Hrg.  104-604 

RUSSIAN  ORGANIZED  CRIME  IN  THE 
UNITED  STATES 


Y  4,  G  74/9:  S,  HRG.  104-604 

Russian  Organized  Crine  in  the  Unit... 

HEARING 

BEFORE  THE 

PERMANENT 
SUBCOMMITTEE  ON  INVESTIGATIONS 

OF  THE 

COMMITTEE  ON 
GOVERNMENTAL  AFFAIRS 
UNITED  STATES  SENATE 

ONE  HUNDRED  FOURTH  CONGRESS 
SECOND  SESSION 


MAY  15,  1996 


Printed  for  the  use  of  the  Committee  on  Governmental  Affairs 


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'^    to? 


<^m 


U.S.   GOVERNMENT  PRINTING  OFFICE 
WASHINGTON  :  1996 


For  sale  by  the  U.S.  Government  Printing  Office 
Superintendent  of  Documents,  Congressional  Sales  Office,  Washington.  DC  20402 
ISBN  0-16-053632-4 


0^ 


S.  Hrg.  104-604 

RUSSIAN  ORGANIZED  CRIME  IN  THE 
UNITED  STATES 


/  4.  G  74/9;  S,  HRG,  104-604 


Russian  Organized  Crine  in  the  Unit... 

HEARING 

BEFORE  THE 

PERMANENT 
SUBCOMMITTEE  ON  IN\^STIGATIONS 

OF  THE 

COMMITTEE  ON 
GOVERNMENTAL  AFFAIRS 
UNITED  STATES  SENATE 

ONE  HUNDRED  FOURTH  CONGRESS 
SECOND  SESSION 


MAY  15,  1996 


Printed  for  the  use  of  the  Committee  on  Governmental  Affairs 


U.S.   GOVERNMENT  PRINTING  OFFICE 
WASHINGTON  :  1996 


For  sale  by  the  U.S.  Government  Printing  Office 
Superintendent  of  Documents,  Congressional  Sales  Office,  Washington,  DC  20402 
ISBN  0-16-053632-4 


COMMITTEE  ON  GOVERNMENTAL  AFFAIRS 

TED  STEVENS,  Alaska,  Chairman 
WILLIAM  V.  ROTH,  Jr.,  Delaware  JOHN  GLENN,  Ohio 

WILLIAM  S.  COHEN,  Maine  SAM  NUNN,  Georgia 

FRED  THOMPSON,  Tennessee  CARL  LEVIN,  Michigan 

THAD  COCHRAN,  Mississippi  DAVID  PRYOR,  Arkansas 

JOHN  MCCAIN,  Arizona  JOSEPH  I.  LIEBERMAN,  Connecticut 

BOB  SMITH,  New  Hampshire  DANIEL  K.  AKAKA,  Hawaii 

HANK  BROWN,  Colorado  BYRON  L.  DORGAN,  North  Dakota 

Albert  L.  McDermott,  Staff  Director 
Leonard  Weiss,  Minority  Staff  Director 
Michal  Sue  Prosser,  Chief  Clerk 


PERMANENT  SUBCOMMITTEE  ON  INVESTIGATIONS 

WILLIAM  V.  ROTH,  Jr.,  Delaware,  Chairman 
TED  STEVENS,  Alaska  SAM  NUNN,  Georgia 

WILLIAM  S.  COHEN,  Maine  JOHN  GLENN,  Ohio 

FRED  THOMPSON,  Tennessee  CARL  LEVIN,  Michigan 

THAD  COCHRAN,  Mississippi  DAVID  PRYOR,  Arkansas 

JOHN  MCCAIN,  Arizona  JOSEPH  I.  LIEBERMAN,  Connecticut 

BOB  SMITH,  New  Hampshire  DANIEL  K.  AKAKA,  Hawaii 

HANK  BROWN,  Colorado  BYRON  L.  DORGAN,  North  Dakota 

Harold  Damelin,  Chief  Counsel  and  Staff  Director 
Daniel  S.  Gelber,  Chief  Counsel  to  the  Minority 
Carla  J.  Martin,  Chief  Clerk 


(II) 


CONTENTS 


Opening  statements:  Page 

Senator  Roth  1 

Senator  Lieberman  6 

Senator  Cohen  6 

Senator  Nunn 62 

WITNESSES 

Wednesday,  May  15,  1996 

George  J.  Weise,  Commissioner,  U.S.  Customs  Service  10 

James  E.  Moody,  Deputy  Assistant  Director,  Criminal  Investigative  Division, 
Federal  Bureau  of  Investigation  15 

Edward  L.  Federico,  Jr.,  Director,  National  Operations  Division,  Criminal 

Investigation,  Internal  Revenue  Service  17 

Igor  Nikolayevich  Kozhevnikov,  Deputy  Minister  of  Interior,  Russian  Ministry 
of  Interior  Affairs  22 

Michael  Franzese,  Former  Capo,  Colombo  Organized  Crime  Family  36 

Anthony  Casso,  Former  Underboss,  Lucchese  Organized  Crime  Family,  ac- 
companied by  Matthew  Brief,  Law  Firm  of  Brief,  Kesselman,  Knapp  and 
Schulman  43 

An  Anonymous  Russian  Criminal  49 

Daniel  Mackey  and  Ralph  Cefarello,  Detectives,  New  York  City  Police  Depart- 
ment          54 

William  Pollard,  Detective,  Organized  Crime  Intelligence  Division,  Los  Ange- 
les Police  Department  56 

An  Anonymous  Witness,  Undercover  Police  Officer  from  Another  City  59 

Alphabetical  List  of  Witnesses 

Anonymous  Russian  Criminal: 

Testimony  49 

Prepared  Statement  172 

Anonymous  Witness: 

Testimony  59 

Prepared  Statement  197 

Casso,  Anthony: 

Testimony  43 

Prepared  Statement  170 

Cefarello,  Ralph: 

Testimony  54 

Prepared  Statement  179 

Federico,  Edward  L.  Jr.: 

Testimony  17 

Prepared  Statement  140 

Franzese,  Michael: 

Testimony  36 

Prepared  Statement  162 

Kozhevnikov,  Igor  Nikolayevich: 

Testimony  22 

Prepared  Statement  156 

Mackey,  Daniel  : 

Testimony  54 

Prepared  Statement  179 

(III) 


IV 

Page 

Moody,  James  E.: 

Testimony  15 

Prepared  Statement  120 

Pollard,  William: 

Testimony  56 

Prepared  Statement  182 

Weise,  George  J.: 

Testimony  10 

Prepared  Statement  100 

APPENDIX 

Exhibits 

1.  Chart,  Heroin  Smuggling  Organizations  in  New  York:  Associated  with 
FSU  Criminal  Network  in  Northeast  U.S.,  prepared  by  the  U.S.  Customs 
Service  73 

2.  Chart,  Money  Laundering,  prepared  by  the  U.S.  Customs  Service 74 

3.  Chart,  Russian/Eurasian  Organized  Crime:  Present  Day  Challenge,  pre- 
pared by  the  U.S.  Customs  Service 75 

4.  Chart,  How  the  Money  Flows,  prepared  by  the  U.S.  Customs  Service 76 

5.  Charts,  U.S.  Customs  Assistance  to  Former  Soviet  Union  and  Central 

and  Eastern  Europe,  prepared  by  the  U.S.  Customs  Service 77 

6.  States  with  Significant  Ethnic  Russian/Eurasian  Population,   prepared 

by  the  Federal  Bureau  of  Investigation 84 

7.  Field  Offices  with  Active  Investigations  on  Eurasian  Organized  Crime 
Groups,  prepared  by  the  Federal  Bureau  of  Investigation 85 

8.  Eurasian  Organized  Crime  Groups  Operating  in  the  United  States,  pre- 
pared by  the  Federal  Bureau  of  Investigation 86 

9.  Eurasian  Organized  Crime  Groups  Active  in  the  United  States,  prepared 

by  the  Federal  Bureau  of  Investigation 88 

10.  Chart,  Structure  of  Daisy  Chain  Participants,  prepared  by  the  Internal 
Revenue  Service 89 

11.  Chart,  Pennsylvania  Department  of  Revenue,  Bureau  of  Motor  Fuel 
Taxes,  Reported  Taxable  Diesel  Gallons,  prepared  by  the  Internal  Reve- 
nue Service 90 

12.  Chart,  Motor  Fuel  Tax  Fraud  Indictments,  prepared  by  the  Internal 
Revenue  Service 91 

13.  Letter  from  Mark  W.  Distaso,  Commander,  Special  Investigations  Bu- 
reau; Sergeant  Matt  Wojnarowski,  Supervisor,  Intelligence/Organized 
Crime  Unit;  and  Agent  Gerald  Uebel,  Lead  Investigator,  Intelligence/ 
Organized  Crime  Unit,  City  of  Glendale  California  Police  Department, 
to  Michael  Bopp,  Subcommittee  Counsel,  Permanent  Subcommittee  on 
Investigations,  dated  May  10,  1996 92 

14.  Letter  from  Gloria  Bryant,  Director,  Office  of  Congressional  Affairs,  to 
Stephen  Levin,  Counsel,  Permanent  Subcommittee  on  Investigations, 
dated  August  19,  1996 97 


RUSSIAN  ORGANIZED  CRIME  IN  THE  UNITED 

STATES 


WEDNESDAY,  MAY  15,  1996 

U.S.  Senate, 
Permanent  Subcommittee  on  Investigations, 
OF  THE  Committee  on  Governmental  Affairs, 

Washington,  DC. 

The  Subcommittee  met,  pursuant  to  notice,  at  9:40  a.m.,  in  room 
SD-342,  Dirksen  Senate  Office  Building,  Hon.  William  V.  Roth,  Jr., 
Chairman  of  the  Subcommittee,  presiding. 

Present:  Senators  Roth,  Cohen,  Nunn,  Lieberman  and  Dorgan. 

Staff  Present:  Harold  Damelin,  Chief  Counsel  and  Staff  Director; 
Daniel  S.  Gelber,  Minority  Chief  Counsel;  Eric  Thorson,  Chief  In- 
vestigator; Stephen  H.  Levin,  Senior  Counsel;  Michael  Bopp,  Coun- 
sel; Carla  J.  Martin,  Chief  Clerk;  Ariadne  Allan,  Investigator;  Sal- 
lie  B.  Cribbs,  Executive  Assistant;  Jack  Cobb,  Counsel;  Deborah 
McMahon,  Investigator;  Susanne  Routhier,  Librarian;  Mary  Ailes, 
Staff  Assistant;  Alan  Edelman,  Counsel  to  the  Minority;  Rick  Keen- 
an,  Detailee;  Ian  Brzezinski  (Senator  Roth);  Susie  Cohen  (Senator 
Roth);  Verna  Hensley  (Senator  Roth);  Rick  Valentine  (Senator 
Smith);  Jeremy  Bates  (Senator  Dorgan);  Sandra  Bruce  (Senator 
Levin);  Nina  Bang-Jensen  (Senator  Lieberman);  and  Helen  Albert 
(Senator  Cohen). 

OPENING  STATEMENT  OF  SENATOR  ROTH 

Senator  ROTH.  The  Subcommittee  will  please  come  to  order. 

This  morning,  the  Permanent  Subcommittee  on  Investigations 
continues  to  fulfill  its  mandate  of  presenting  to  Congress  and  to  the 
American  people  the  changing  face  of  organized  crime  in  the  Unit- 
ed States.  Today  we  will  examine  the  currently  emerging  threat 
posed  by  Russian  organized  crime  here  in  America. 

Over  its  long  history,  this  Subcommittee  has  been  at  the  fore- 
front of  exposing  the  dangers  posed  by  organized  crime  groups  op- 
erating within  our  borders,  including  Colombian  and  Asian  crimi- 
nal organizations.  We  found  that  the  spotlight  of  exposure  and  the 
glare  of  public  scrutiny  are  among  our  most  effective  weapons 
against  these  resourceful  and  resilient  groups,  which  operate  most 
effectively  in  the  netherworld  of  secrecy,  fear  and  intimidation. 

We  can  be  particularly  effective  if  we  can  expose  an  organized 
group  in  its  early  stages,  and  that  is  why  we  are  here  today. 
Through  experience,  we  know  how  hard  it  is  to  dislodge  any  crimi- 
nal group  once  it  has  become  entrenched  in  legitimate  businesses 
and  its  members  assimilated  into  American  communities. 

(1) 


It  may  be  useful  to  begin  with  a  short  geography  lesson.  When 
we  used  the  term  "Russian  organized  crime"  in  the  course  of  this 
hearing,  we  are  referring  to  organized  crime  from  all  the  republics 
of  the  former  Soviet  Union,  not  only  from  the  Republic  of  Russia. 
We  realize  the  limitations  of  this  definition  but  have  chosen  to  use 
this  phrase  because  of  its  widespread  recognition  and  acceptance. 

I  also  want  to  make  clear  that  the  vast  majority  of  former  Soviet 
citizens  currently  residing  in  America  are  law-abiding,  hard-work- 
ing and  extremely  productive  members  of  our  society.  In  fact,  these 
are  the  people  who  are  most  often  the  victims  of  this  criminal  ac- 
tivity. Like  most  other  international  organized  crime  groups,  those 
from  the  former  Soviet  Union  start  out  by  preying  primarily  on 
their  own  ethnic  communities  in  the  United  States. 

The  fact  that  former  Soviet  emigres  to  this  country  suffer  dis- 
proportionately at  the  hands  of  criminals  who  are  their  former 
countrymen  leads,  unfortunately,  to  an  often  unspoken  but  never- 
theless widely  held  point  of  view,  namely,  that  because  former  So- 
viet citizens  are  most  often  the  victims  of  these  crimes,  the  rest  of 
us  need  not  concern  ourselves  with  this  problem. 

I  categorically  reject  that  view.  First,  all  residents  of  our  Nation 
are  entitled  to  protection  no  matter  what  their  backgrounds.  Sec- 
ond, if  we  have  learned  anything  from  our  previous  investigations, 
it  is  that  all  organized  criminals,  whatever  their  ethnic  origin, 
eventually  extend  their  greedy  tentacles  beyond  their  native  com- 
munities into  American  society  as  a  whole  in  a  never-ending  reach 
for  more  money,  power  and  influence. 

Russian  organized  crime  presents  a  textbook  example  of  what  I 
have  referred  to  as  "the  new  international  criminals";  they  are  a 
breed  set  apart  from  traditional  organized  crime.  Despite  having 
roots  that  can  be  traced  back  to  earlier  times,  criminals  from  the 
former  Soviet  Union  have  thrived  by  adapting  to  and  exploiting 
modern  technology.  They  have  created  global  communication  net- 
works through  the  use  of  satellite  telephones,  cellular  clone  phones 
and  encrypted  fax  machines. 

Combined  with  relaxed  travel  restrictions  and  a  greatly  in- 
creased volume  of  international  trade,  these  developments  have  al- 
lowed criminal  organizations  based  in  one  country  to  extend  their 
operations  throughout  the  world.  Russian  organized  crime  in  par- 
ticular conducts  complex  fraud  schemes,  traffics  in  narcotics,  prac- 
tices extortion,  and  even  commits  murder  without  regard  to  inter- 
national borders. 

And  in  this  country,  Russian  organized  crime  has  undergone  a 
profound  transformation  over  time.  In  the  1970's  and  1980's,  the 
Russians  who  came  to  the  United  States  were  predominantly  reli- 
gious refugees  and  those  posing  as  such  in  order  to  gain  entry.  The 
criminal  ways  some  of  these  Russians  followed  once  they  arrived 
largely  involved  white  collar  offenses  such  as  fuel  tax  and  insur- 
ance fraud  schemes. 

The  breakup  of  the  former  Soviet  Union  resulted  in  a  new  wave 
of  emigres  which,  as  we  will  hear  today,  includes  hardened  crimi- 
nals more  prone  to  violence.  It  also  includes  criminals  who  operate 
with  others  across  oceans  and  borders.  Following  modern  inter- 
national business  practices,  Russian  organized  crime  is  forming 
working  relationships  with  other  international  organized  groups. 


For  example,  working  with  Asian  organized  crime  groups,  Rus- 
sian criminals  are  smuggling  heroin,  which  is  relatively  cheap  and 
plentiful  in  the  former  Soviet  Union,  to  the  United  States.  Like- 
wise, working  with  Colombian  drug  traffickers,  Russian  organized 
crime  is  brokering  deals  in  the  United  States  to  ship  Colombian  co- 
caine to  Europe  and  the  former  Soviet  Union,  where  it  is  expensive 
and  hard  to  come  by — your  classic  win-win  deals  for  both  parties. 

Russian  hit  men,  unknown  to  American  law  enforcement,  are 
suspected  of  traveling  to  the  United  States  to  do  contract  killings 
and  then  disappearing  after  the  job  is  done.  Money  made  from  ille- 
gal enterprises  in  the  former  Soviet  Union  is  easily  moved  out  of 
the  country  and  laundered  throughout  the  world  to  conceal  its 
criminal  origins. 

Organized  crime  clearly  has  become  an  international  problem, 
and  Russian  organized  crime  is  the  latest  example.  No  longer  can 
we  think  of  this  as  a  domestic  problem  that  any  single  Nation  is 
capable  of  solving  on  its  own.  International  problems  require  inter- 
national solutions.  For  too  long,  the  international  borders  that 
these  criminals  routinely  ignore  have  served  as  obstacles  for  law 
enforcement.  We  must  work  together  as  nations  to  overcome  these 
obstacles  instead  of  allowing  criminals  to  use  them  as  gateways  to 
freedom. 

Imagine  Bonnie  and  Clyde  gone  international — because  that  is 
exactly  what  is  happening.  In  the  1920's,  bank  robbers  figured  out 
that  by  using  automobiles  to  rob  banks,  then  quickly  crossing  State 
lines,  they  could  evade  the  jurisdiction  of  State  and  local  law  en- 
forcement. It  was  no  wonder  that  a  rash  of  interstate  bank  robber- 
ies soon  followed.  We  eventually  solved  this  problem  by  enacting  a 
Federal  bank  robbery  statute. 

Solutions  to  the  problems  posed  by  Russian  and  other  new  inter- 
national criminal  groups  are  neither  as  obvious  nor  as  easily  en- 
forceable. No  single  international  low  enforcement  agency  exists  to 
assume  jurisdiction.  And  while  law  enforcement  agencies  have 
made  great  strides  and  established  formal,  bilateral  cooperative 
agreements  and  informal  working  relationships,  there  remains 
much  to  be  done  to  enable  law  enforcement  throughout  the  world 
to  obtain  information,  locate  documents,  accomplish  service  of  proc- 
ess, and  extradite  criminals. 

Further,  there  are  still  nations  that  effectively  serve  as  sanc- 
tuaries for  these  new  international  criminals.  We  must  work  to 
eliminate  any  safe  haven  where  these  criminals  can  hide. 

Today  we  will  hearing  a  comprehensive  overview  fi'om  the  Cus- 
toms Service,  FBI,  and  the  Internal  Revenue  Service  regarding 
Russian  criminal  activity  in  the  United  States.  In  addition,  we  are 
privileged  to  hear  from  an  official  from  the  Russian  Interior  Min- 
istry who  will  discuss  the  steps  taken  by  both  of  our  nations'  law 
enforcement  agencies  to  facilitate  increased  cooperation  on  this 
issue. 

We  will  hear  from  insider  witnesses  who  will  give  us  unique  per- 
spectives on  the  nature  of  Russian  criminal  activity  in  the  United 
States  as  well  as  its  interaction  here  with  traditional  organized 
crime. 

Finally,  we  will  hear  today  from  those  who  are  our  first  line  of 
defense  in  dealing  with  this  and  all  of  our  organized  crime  prob- 


lems,  our  Nation's  local  police  officers.  These  officers  all  serve  in 
areas  beset  by  criminals  from  the  former  Soviet  Union  and  will 
give  us  the  benefit  of  their  firsthand  experience  in  dealing  with 
this  threat. 

One  of  the  reasons  why  this  Subcommittee  has  been  able  to  con- 
duct these  complex  investigations  so  effectively  is  our  ability  to 
work  together  without  regard  to  partisan  politics.  Today's  hearing 
is  no  exception.  It  is  the  product  of  a  joint  investigation  conducted 
by  the  majority  and  minority  staffs  working  together  on  this  most 
important  issue. 

[The  prepared  statement  of  Senator  Roth  follows:] 

PREPARED  STATEMENT  OF  SENATOR  ROTH 

The  Subcommittee  will  come  to  order. 

This  morning,  the  Permanent  Subcommittee  on  Investigations  continues  to  fulfill 
its  mandate  of  presenting  to  the  Congress  and  to  the  American  people  the  changing 
face  of  organized  crime  in  the  United  States.  Today,  we  will  examine  the  currently 
emerging  threat  posed  by  Russian  organized  crime  here  in  America. 

Over  its  long  history,  this  Subcommittee  has  been  at  the  forefront  of  exposing  the 
dangers  posed  by  organized  crime  groups  operating  within  our  borders,  including 
Colombian  and  Asian  criminal  organizations.  We  have  found  that  the  spotlight  of 
disclosure  and  the  glare  of  public  scrutiny  are  among  cur  most  effective  weapons 
against  these  resourceful  and  resilient  groups,  which  operate  most  effectively  in  the 
netherworld  of  secrecy,  fear  and  intimidation. 

We  can  be  particularly  effective  if  we  can  expose  an  organized  crime  group  in  its 
early  stages,  and  that  is  why  we  are  here  today.  Through  experience,  we  know  how 
hard  it  is  to  dislodge  any  criminal  group  once  it  has  become  entrenched  in  legiti- 
mate businesses  and  its  members  assimilated  into  American  communities. 

It  may  be  best  to  begin  with  a  short  geography  lesson.  When  we  use  the  term 
"Russian  organized  crime"  during  the  course  of  this  hearing,  we  are  referring  to  or- 
ganized crime  from  all  of  the  republics  of  the  former  Soviet  Union,  not  only  from 
the  republic  of  Russia.  We  realize  the  limitations  of  this  definition,  but  have  chosen 
to  use  this  phrase  because  of  its  widespread  recognition  and  acceptance. 

I  also  want  to  make  clear  that  the  vast  majority  of  former  Soviet  citizens  cur- 
rently residing  in  America  are  law-abiding,  hard-working  and  extremely  productive 
members  of  society.  In  fact,  these  are  the  people  who  are  most  often  the  victims  of 
this  criminal  activity  since,  like  most  other  international  organized  crime  groups, 
those  from  the  former  Soviet  Union  start  out  by  preying  primarily  on  their  own  eth- 
nic communities  in  the  United  States. 

The  fact  that  former  Soviet  emigres  to  this  country  suffer  disproportionately  at 
the  hands  of  criminals  who  are  their  former  countrymen  leads,  unfortunately,  to  an 
often  unspoken,  but  nevertheless  widely  held  view  that,  because  former  Soviet  citi- 
zens are  most  often  the  victims  of  these  crimes,  the  rest  of  us  need  not  concern  our- 
selves with  this  problem.  I  categorically  reject  that  view. 

First,  all  residents  of  our  Nation  are  entitled  to  protection,  no  matter  what  their 
background.  Second,  if  we  have  learned  anything  from  our  previous  investigations, 
it  is  that  all  organized  criminal  groups,  whatever  their  ethnic  origins,  eventually  ex- 
tend their  greedy  tentacles  beyond  their  native  communities  into  American  society 
as  a  whole  in  a  never-ending  reach  for  more  money,  power  and  influence. 

Russian  organized  crime  presents  a  textbook  example  of  what  I  have  referred  to 
as  "the  new  international  criminals."  They  are  a  breed  set  apart  from  "traditional" 
organized  crime.  Despite  having  roots  that  can  be  traced  back  to  Tsarist  times, 
criminals  from  the  former  Soviet  Union  have  thrived  by  adapting  to  and  exploiting 
modern  technology.  They  have  created  global  communications  networks  through  the 
use  of  satellite  telephones,  cellular  clone  phones,  and  encrypted  fax  machines.  Com- 
bined with  relaxed  travel  restrictions  and  a  greatly  increased  volume  of  inter- 
national trade,  these  developments  have  allowed  criminal  organizations  based  in 
one  country  to  extend  their  operations  throughout  the  world.  Russian  organized 
crime,  in  particular,  conducts  complex  fraud  schemes,  traffics  in  narcotics,  practices 
extortion  and  even  commits  murder,  without  regard  to  international  borders. 

In  this  country,  Russian  organized  crime  has  undergone  a  profound  trans- 
formation over  time.  In  the  1980's,  Russians  emigres  who  came  to  the  United  States 
were  predominantly  religious  refugees  and  those  posing  as  such  in  order  to  gain 
entry.  The  criminal  ways  some  of  these  Russians  followed  once  they  arrived  largely 


involved  "white  collar"  offenses  such  as  fuel  tax  and  insurance  fraud  schemes.  The 
break-up  of  the  former  Soviet  Union  resulted  in  a  new  wave  of  immigrants,  which, 
as  we  will  hear  today,  includes  hardened  criminals,  more  prone  to  violence.  It  also 
includes  criminals  who  operate  with  others  across  oceans  and  borders. 

Following  modern  international  business  practices,  Russian  organized  crime  is 
forming  working  relationships  with  other  international  organized  groups.  For  exam- 
ple, working  with  Asian  organized  crime  groups,  Russian  criminals  are  smuggling 
heroin,  which  is  relatively  cheap  and  plentiful  in  the  former  Soviet  Union,  into  the 
United  States.  Likewise,  working  with  Colombian  drug  traffickers,  Russian  orga- 
nized crime  is  brokering  deals  in  the  United  States  to  ship  Colombian  cocaine  to 
Europe  and  the  former  Soviet  Union,  where  it  is  expensive  and  hard  to  come  by — 
your  classic  "win,  win"  deals  for  both  parties. 

Russian  hit  men,  unknown  to  American  law  enforcement,  are  suspected  of  travel- 
ing to  the  United  States  to  do  contract  killings  and  disappearing  after  the  job  is 
done.  Money  made  from  illegal  enterprises  in  the  former  Soviet  Union  is  easily 
moved  out  of  the  country  and  laundered  throughout  the  world  to  conceal  its  criminal 
origins. 

Organized  crime  clearly  has  become  an  international  problem  and  Russian  orga- 
nized crime  is  the  latest  example.  No  longer  can  we  think  of  this  as  a  domestic  prob- 
lem that  any  single  nation  is  capable  of  solving  on  its  own.  International  problems 
require  international  solutions.  For  too  long,  the  international  borders  that  these 
criminals  routinely  ignore  have  served  as  obstacles  for  law  enforcement.  We  must 
work  together  as  nations  to  overcome  these  obstacles,  instead  of  allowing  criminals 
to  use  them  as  gateways  to  freedom. 

Imagine  Bonnie  and  Clyde  gone  international — because  that  is  exactly  what  is 
happening.  In  the  1920's,  bank  robbers  figured  out  that  by  using  automobiles  to  rob 
banks  and  then  quickly  cross  State  lines,  they  could  evade  the  jurisdiction  of  State 
and  local  law  enforcement.  It  was  no  wonder  that  a  rash  of  interstate  bank  robber- 
ies soon  followed.  We  eventually  solved  this  problem  by  enacting  a  Federal  bank 
robbery  statute.  Solutions  to  the  problems  posed  by  Russian  and  other  new  inter- 
national criminal  groups  are  neither  as  obvious  nor  as  easily  enforceable. 

No  single  international  law  enforcement  agency  exists  to  assume  jurisdiction. 
While  law  enforcement  agencies  have  made  great  strides  and  established  formal,  bi- 
lateral, cooperative  agreements  and  informal  working  relationships,  there  remains 
much  to  be  done  to  enable  law  enforcement  throughout  the  world  to  obtain  informa- 
tion, locate  documents  and  accomplish  service  of  process.  Further,  there  are  still  na- 
tions that  effectively  serve  as  sanctuaries  for  these  new  international  criminals.  We 
must  work  to  eliminate  any  safe  haven  where  these  criminals  can  hide. 

Today,  we  will  receive  a  comprehensive  overview  from  the  Customs  Service,  the 
FBI,  and  the  Internal  Revenue  Service  regarding  Russian  criminal  activity  in  the 
United  States.  In  addition,  we  are  privileged  to  hear  from  an  official  of  the  Russian 
Interior  Ministry,  who  will  discuss  the  steps  taken  by  both  of  our  nations'  law  en- 
forcement agencies  to  facilitate  increased  cooperation  on  this  issue. 

We  will  also  hear  from  insider  witnesses  who  will  give  us  unique  perspectives  on 
the  nature  of  Russian  criminal  activity  in  the  United  States,  as  well  as  its  inter- 
action here  with  traditional  organized  crime. 

Finally,  we  will  hear  today  from  those  who  are  our  first  line  of  defense  in  dealing 
with  this,  and  all  of  our  organized  crime  problems — our  Nation's  local  police  officers. 
These  officers  all  serve  in  areas  beset  by  criminals  from  the  former  Soviet  Union 
and  will  give  us  the  benefit  of  their  first-hand  experience  in  dealing  with  this 
threat. 

One  of  the  reasons  why  this  Subcommittee  has  been  able  to  conduct  these  com- 
plex investigations  so  effectively  is  our  ability  to  work  together  without  regard  to 
partisan  politics.  Today's  hearing  is  the  product  of  a  joint  investigation  conducted 
by  the  Majority  and  Minority  staffs  working  together  on  this  most  important  prob- 
lem. I  would  like  to  commend  my  colleague.  Senator  Nunn,  the  Subcommittee's 
Ranking  Member,  and  his  staff  for  their  cooperation  in  conducting  this  investiga- 
tion. In  spite  of  the  many  organized  crime  hearings  we  have  done  together,  there 
always  seems  to  be  a  new  group  emerging  that  requires  the  Subcommittee's  atten- 
tion. 

The  demise  of  the  Cold  War  did  not  spark  the  first  flickers  of  Russian  organized 
crime.  But  it  created  unprecedented  opportunities  to  fuel  its  growth.  The  expansion 
of  Russian  organized  crime  in  the  United  States  poses  challenges  we  ignore  at  our 
peril.  We  cannot  allow  our  past  successes  against  traditional  organized  crime  to  lead 
to  complacency  in  dealing  with  these  new  international  criminals.  For,  although  the 
faces  change,  the  threat  remains  the  same. 


Senator  ROTH.  I  would  now  like  to  call  on  my  friend  and  col- 
league, the  distinguished  Senator  from  Connecticut. 

OPENING  STATEMENT  OF  SENATOR  LIEBERMAN 

Senator  LlEBERMAN.  Thank  you,  Mr.  Chairman. 

As  you  know,  Senator  Nunn  will  be  here  shortly;  he  is  attending 
a  funeral  this  morning,  and  I  know  he  would  want  to  second,  and 
undoubtedly  will,  the  nonpartisan  way  in  which  this  Permanent 
Subcommittee  on  Investigations  has  gone  forward  with  its  work, 
and  I  thank  you  for  that.  As  you  said  at  the  beginning  of  your 
statement,  this  Subcommittee  has  played  an  historic  role  in  Amer- 
ica in  focusing  public  attention  on  organized  crime  at  the  various 
stages  of  its  evolution,  and  it  is  in  that  sense  that  this  hearing  this 
morning  I  think  is  particularly  important  and  will  be  helpful  to  the 
Congress,  to  the  American  people  and  to  law  enforcement  agencies 
throughout  our  country. 

As  your  statement  indicated,  the  new  face  of  organized  crime, 
which  in  this  case  is  covered  by  the  generic  term,  "Russian  orga- 
nized crime,"  is  a  combination  of  the  worst  of  the  old  and  the  worst 
of  the  new  in  the  sense  that  this  new  generation  of  organized 
criminals  is  as  capable  as  any  of  their  predecessors  of  emplo3dng 
the  worst  forms  of  violence  and  brutality  and  of  preying  on  people's 
weaknesses  and  terrorizing  people  through  force.  But  it  is  the 
worst  application  of  the  new  in  the  sense  that  it  employs  most  of 
the  instruments  of  the  new  technological  information  age  to 
achieve  its  evil  purposes.  And  one  of  those  capacities  which  is 
greater  than  existed  for  old  organized  crime  is  the  ability  to  very 
quickly  and  effectively  operate  internationally,  with  all  the  implica- 
tions that  has. 

Clearly,  one  of  the  implications  that  worries  many  of  us — and  it 
is  not  conventional  organized  activity — is  the  extent  to  which  orga- 
nized criminal  groups  including  the  Russian  groups  may  conduct 
activities  that  spill  over  into  not  just  our  concern  about  domestic 
security,  which  is  to  say  law  and  order,  security  from  crime  here 
at  home,  but  the  extent  to  which  they  may  spill  over  into  inter- 
national security,  and  particularly  on  the  question  of  whether  they 
are  involved  at  all  or  there  is  a  danger  that  they  will  be  involved 
in  the  smuggling  or  misappropriation  of  weapons  of  mass  destruc- 
tion that  may  be  in  the  possession  of  the  Russian  Government 
today. 

This  is  a  very  important  hearing,  and  you  have  assembled  an  ex- 
traordinarily impressive  and  relevant  group  of  witnesses.  I  thank 
you,  Mr.  Chairman,  for  your  great  leadership  in  this  effort,  and  I 
look  forward  to  the  hearing  today. 

Senator  ROTH.  Thank  you,  Senator  Lieberman. 

It  is  now  my  pleasure  to  call  on  my  good  friend.  Senator  Cohen. 

OPENING  STATEMENT  OF  SENATOR  COHEN 

Senator  Cohen.  Thank  you,  Mr.  Chairman.  You  gave  a  very  com- 
prehensive opening  statement,  and  I  will  not  try  to  improve  upon 
that,  other  than  asking  permission  to  insert  my  full  statement  in 
the  record,  and  I  will  just  make  a  few  comments. 

The  Chairman  has  talked  about  the  increased  violence  that  is 
taking  place  on  the  part  of  criminal  gangs  operating  in  the  former 


Soviet  Union,  but  who  now  also  operate  gangland  fashion  here  in 
the  United  States.  One  issue  that  we  certainly  have  to  be  con- 
cerned with  is  the  level  of  violence  that  these  groups  will  engage 
in  to  intimidate  and  extort  and  simply  instill  an  overwhelming 
sense  of  fear  on  the  part  of  both  American  citizens  and  non-Amer^ 
ican  residents  here  in  the  United  States.  That  is  one  aspect  that 
we  have  to  be  very  concerned  about. 

As  the  Chairman  has  indicated,  however,  gang  activity  has 
moved  into  the  white  collar  criminal  aspects  as  well.  When  we  talk 
about  white  collar  crime,  we  tend  to  think  that  this  is  really  only 
a  question  of  money.  What  I  would  like  to  say  this  morning,  Mr. 
Chairman,  is  that  it  is  not  only  your  money,  but  it  is  your  life  in 
some  particular  cases. 

By  way  of  example,  this  Subcommittee  in  cooperation  with  the 
Senate  Aging  Committee  has  been  conducting  investigations  into 
health  care  fraud,  and  we  have  worked  very  closely  with  the  FBI 
to  develop  legislation  that  will  help  combat  health  care  fraud.  One 
case  comes  to  mind — and  we  had  the  FBI  testify  about  this  situa- 
tion— where  two  brothers  from  Lithuania  set  up  what  we  call  a 
"rolling  lab"  in  Southern  California,  and  this  "rolling  lab"  scheme 
operated  across  the  country  in  areas  like  St.  Louis,  Chicago,  Flor- 
ida, as  well  as  Southern  California. 

They  would  send  out  inducements  for  local  residents  to  come  by 
and  have  a  medical  examination  at  no  cost,  or  at  a  greatly  reduced 
cost.  What  happened  as  a  result  of  this  "rolling  lab,"  which  was 
performing  tests  in  unsanitary  and  unsafe  conditions,  is  that  they 
were  leading  those  who  were  having  the  tests  performed  to  believe 
they  were  being  performed  by  adequate,  competent  medical  person- 
nel. However,  certain  symptoms  which  were  diagnosed  were  never 
followed  up  on,  so  those  unsuspecting  individuals  who  were  coming 
forward  to  go  into  this  "rolling  lab"  were  under  the  impression,  if 
no  negative  results  came  back,  that  they  were  in  perfect  health, 
which  was  not  the  case.  So,  in  a  number  of  cases,  individuals  who 
had  serious  problems  went  completely  untreated. 

The  converse  was  also  true,  that  some  individuals  who  were  com- 
pletely healthy  had  reports  filed  indicating  that  they  were  suffering 
from  serious  diseases  which  caused  their  insurance  companies  to 
cancel  their  insurance  even  though  they  were  in  perfect  health. 

So  we  had  a  situation  in  which  $1  billion  was  extracted  from  our 
health  insurance  companies  as  such,  with  one  company  haying  to 
operate  in  the  red  for  a  period  of  2  years  as  a  result  of  this  type 
of  activity. 

So  it  is  not  only  your  money  that  is  being  extorted  or  taken;  it 
could  be  your  life,  as  a  result  of  these  organized  crime  activities. 

So  Mr.  Chairman,  as  you  pointed  out,  they  are  very  complicated, 
they  are  very  sophisticated,  and  the  face  of  evil  wears  many  dis- 
guises. I  am  not  sure  in  what  stage  the  Russian  organized  crime 
activities  in  this  country  are  at — it  could  be  the  larval  stage,  or  it 
might  be  much  more  evolved  as  far  as  its  establishment,  taking 
root  in  this  country  in  cooperation,  as  the  Chairman  said,  with 
other  organized  criminal  groups.  But  they  now  have  woven  a  web 
of  international  proportions  and  dimensions  which  may  be  far  more 
evolved  than  we  have  any  notion  of  right  now. 


8 

So  I  look  forward  to  the  testimony,  Mr.  Chairman,  and  I  want 
to  commend  the  Subcommittee  staff  in  particular  for  the  enormous 
amount  of  work  that  they  have  done  to  prepare  for  this  hearing. 

Senator  Roth.  Thank  you,  Senator  Cohen,  and  I  would  just  like 
to  publicly  acknowledge  what  an  outstanding  job  you  have  done  in 
the  area  of  medical  fraud  in  developing  legislation  to  address  it.  I 
have  been  pleased  to  work  with  you  on  that  critically  important 
matter. 

I  would  say  to  all  of  our  witnesses  that  we  will,  of  course,  enter 
your  full  statements  into  the  record,  as  we  will  do  in  the  case  of 
your  opening  statement,  Senator  Cohen. 

[The  prepared  statement  of  Senator  Cohen  follows:] 

PREPARED  STATEMENT  OF  SENATOR  COHEN 

Mr.  Chairman,  I  am  pleased  to  participate  in  today's  hearing  on  the  rise  of  Rus- 
sian organized  crime  in  the  United  States  and  I  would  like  to  commend  you  and 
the  ranking  member,  Senator  Nunn,  for  your  longstanding,  bipartisan  efforts  to  in- 
vestigate organized  crime  here  in  the  United  States  and  around  the  world. 

As  I  stated  2  years  ago  at  another  PSI  hearing  on  international  organized  crime, 
a  battle  is  being  waged  on  the  streets  of  St.  Petersburg,  Moscow,  Warsaw  and  Kiev 
between  the  rule  of  law  and  the  rule  of  the  gun.  President  Yeltsin  said  that  orga- 
nized crime  threatened  the  foundation  of  Russian  society.  Because  of  the  increase 
in  shootouts  among  rival  gangs  over  dividing  the  spoils,  Moscow  had  been  compared 
to  Chicago  during  prohibition.  Unfortunately,  as  we  will  hear  today,  gangland 
shootings  are  on  the  rise  not  only  there  but  on  our  streets  as  well. 

There  now  is  evidence  that  criminal  operatives  from  Russia  and  from  the  other 
former  Soviet  republics  have  come  to  the  United  States.  Presently,  Russian/Eur- 
asian criminal  groups  are  engaged  in  a  myriad  of  criminal  activities  here  in  the  U.S. 
including:  fuel  tax  fraud,  medical  and  insurance  fraud,  staged  automobile  accidents, 
extortion,  loan  sharking,  drug  trafficking,  credit  card  forgery,  counterfeiting,  auto 
theft,  prostitution  and  murder. 

As  the  author  of  the  enhanced  health  care  anti-fraud  penalty  provisions  that 
passed  in  Budget  Reconciliation  last  year,  and  which  are  now  pending  in  the  Kasse- 
baum/Kennedy  health  insurance  reform  bill,  I  have  been  particularly  active  in  inves- 
tigating health  care  fraud  in  the  U.S.  Federal  and  State  programs,  and  in  private 
health  care  plans.  One  of  the  most  pernicious  medical  fraud  schemes  uncovered  in 
recent  times  involved  a  scam  referred  to  as  the  "rolling  lab"  case.  Two  brothers,  Mi- 
chael and  David  Smushkevich,  who  were  emigres  from  Lithuania  and  who  were  part 
of  Russian  organized  crime,  created  a  fraud  ring  which  ran  mobile  diagnostic  testing 
labs  and  clinics  in  Southern  California,  St.  Louis,  Chicago,  and  Florida.  This  scheme 
defrauded  private  and  government  health  insurers  of  approximately  $1  billion. 

Patients  were  lured  to  clinics  or  sites  serviced  by  mobile  vans  for  comprehensive 
physical  examinations  with  bogus  claims  of  "state  of  the  art"  testing  offered  "free 
of  charge"  or  at  a  nominal  cost  to  the  patient.  Billings  for  nonexistent  services,  false- 
ly inflated  billings,  or  billings  for  unnecessary  services  provided  the  basis  of  the 
scheme. 

The  impact  of  this  scheme  was  so  drastic  that  one  insurer  operated  in  the  red 
for  two  consecutive  years  as  a  result  of  the  fraudulent  claims.  Moreover,  the  health 
of  patients  was  jeopardized  by  the  slipshod  examinations  and  failure  to  obtain  prop- 
er medical  histories.  These  scam  artists  did  not  properly  follow  up  on  abnormal 
symptoms  and  test  results,  leaving  those  patients  who  actually  suffered  from  serious 
medical  problems  with  a  false  sense  of  security.  The  perpetrators  often  administered 
tests  under  unsafe  conditions,  performing  cardiac  stress  tests  without  proper  resus- 
citation equipment  and,  at  times,  without  a  doctor  present. 

Some  patients  even  had  their  health  coverage  jeopardized  when  their  insurers  re- 
ceived medical  claims  falsely  reporting  that  the  patient  suffered  from  serious  "pre- 
existing medical  conditions"  that,  in  fact,  did  not  exist  at  all.  Legitimate  medical 
providers  were  also  damaged  when  the  perpetrators  stole  their  taxpayer  identifica- 
tion numbers  for  use  in  submitting  claims. 

The  rolling  lab  case  is  not  an  isolated  example.  The  health  care  system  is  built 
on  a  foundation  of  trust  and  therefore  can  be  easy  to  defraud.  An  investigation  of 
health  care  fraud  that  I  have  conducted  through  the  Special  Committee  on  Aging 
identified  cases  of  Russian  criminals  going  into  their  own  communities  to  induce 
Medicaid  recipients  with  gifts  such  as  angora  undergarments  and  television  sets  in 


order  to  obtain  the  use  of  their  cards  for  the  purpose  of  bilHng  unnecessary  supplies 
to  insurance  carriers. 

Our  investigation  also  identified  staged  accident  rings  in  which  phony  medical 
clinics  have  been  set  up  in  order  to  submit  false  claims  for  unnecessary  treatments. 
In  some  instances,  phony  law  firms  using  figurehead  attorneys  have  been  set  up  to 
further  this  scheme. 

As  Russian  organized  crime  groups  have  become  more  active  in  the  United  States, 
incidents  of  violence  related  to  their  operations  here  have  become  more  frequent. 
For  example,  according  to  the  FBI,  in  1993  the  body  of  a  former  Soviet  from  Odessa 
was  found  with  multiple  shot  wounds  in  the  head.  He  had  been  the  president  of  a 
purported  brokerage  firm  specializing  in  the  exporting  of  American  goods  to  Russia. 
In  actuality,  he  was  suspected  of  being  a  high-ranking  organized  crime  figure  who 
had  been  the  target  of  two  earlier  murder  attempts  the  year  before. 

In  another  case,  the  body  of  a  Russian  emigre  was  found  at  JFK  airport  in  New 
York.  This  individual  had  been  kidnapped  in  Brooklyn  the  month  before.  He  had 
allegedly  been  involved  in  fraud  activities  and  had  been  shot  in  the  head  four  times. 
Another  violent  incident  involved  the  shooting  of  a  Russian  in  a  wholesale  gasoline 
company  in  the  Sheepshead  Bay  area  of  Brooklyn.  He  was  shot  multiple  times  by 
a  man  using  a  submachine  gun.  This  Russian  casualty  had  previously  been  indicted 
on  charges  relating  to  the  use  of  fraudulent  credit  cards. 

Although  some  will  argue  that  we  are  only  witnessing  the  early  stages  of  a  crimi- 
nal enterprise,  it  is  clear  that  Russian/Eurasian  organized  crime  is  on  the  rise  in 
both  white  collar  crimes  and  violent  acts.  Some  in  law  enforcement  believe  that  they 
will  eventually  compare  equally  to  more  traditional  organized  crime  groups,  such  as 
Italian  criminal  groups  and  Colombian  trafficking  organizations,  in  terms  of  inter- 
national capabilities.  As  we  will  hear  from  today's  witnesses,  unlike  these  better- 
established  criminal  groups,  who  are  primarily  involved  in  drug  trafficking  and  re- 
lated money  laundering  in  the  United  States,  the  Russian  criminal  enterprises  are 
heavily  involved  in  a  wide  range  of  fraud  and  economic  crime  in  the  United  States. 

In  conclusion,  I  stated  almost  2  years  ago  that  failure  to  cooperate  on  an  inter- 
national level  would  have  dire  consequences.  We  in  the  United  States  and  western 
Europe  would  be  faced  with  the  consequences  of  a  failure  to  address  the  criminal 
situation  in  Russia  as  their  operations  would  spread  further  to  our  shores.  As  we 
will  hear  today,  unfortunately  that  is  no  longer  just  a  statement  of  warning  since 
Russian  crime  has  not  only  arrived  at  our  shores  but  is  spreading  across  our  entire 
country.  I  look  forward  to  hearing  today's  testimony. 

Senator  RoTH.  We  do  have  a  lot  of  witnesses  here  to  testify 
today,  so  it  would  be  appreciated  if  each  of  you  would  summarize 
your  written  testimony  in  approximately  10  minutes  to  allow  time 
for  questions  and  answers. 

Our  first  witnesses  are  a  panel  of  American  and  Russian  law  en- 
forcement officials.  We  are  very  pleased  to  welcome  the  Commis- 
sioner of  the  U.S.  Customs  Service,  George  Weise;  Jim  E.  Moody, 
Deputy  Assistant  Director  of  the  Criminal  Investigative  Division  of 
the  Federal  Bureau  of  Investigations;  Edward  Federico,  Director  of 
Criminal  Investigations  of  the  National  Operations  Division  of  the 
Internal  Revenue  Service;  and  finally,  we  are  particularly  pleased 
to  welcome  Igor  Kozhevnikov,  who  is  Deputy  Minister  of  the  Rus- 
sian Ministry  of  Interior  Affairs. 

Mr.  Minister,  I  want  to  extend  the  Subcommittee's  welcome  and 
appreciation  for  your  appearing  before  us  this  morning. 

For  everyone's  convenience,  we  have  simultaneous  interpretation 
equipment  available  for  the  Minister's  testimony.  Channel  1  on  the 
handset  will  be  broadcast  in  English,  and  Channel  2  will  be  broad- 
cast in  Russian. 

Now,  I  would  say  to  our  witnesses  it  is  the  practice  that  we 
swear  in  all  witnesses  who  appear  before  the  Subcommittee,  so  I 
would  ask  that  each  of  you  rise  and  raise  your  right  hand. 

Do  you  swear  or  affirm  that  the  testimony  you  will  give  before 
this  Subcommittee  is  the  truth,  the  whole  truth,  and  nothing  but 
the  truth,  so  help  you,  God? 


10 

Mr.  Weise.  I  do. 

Mr.  Moody.  I  do. 

Mr.  Federico.  I  do. 

Mr.  KOZHEVNIKOV.  Yes. 

Senator  ROTH.  Thank  you,  and  please  be  seated. 

We  will  begin  with  the  testimony  of  Commissioner  Weise. 

Commissioner  Weise? 

TESTIMONY  OF  GEORGE  J.  WEISE,i  COMMISSIONER,  U.S. 
CUSTOMS  SERVICE 

Mr.  Weise.  Thank  you,  Mr.  Chairman,  and  good  morning  to  all 
of  you.  It  is  a  real  pleasure  to  be  here  this  morning  to  have  an  op- 
portunity to  thank  this  Subcommittee  for  the  continuing  support 
you  have  provided  to  the  U.S.  Customs  Service. 

My  purpose  today  is  to  outline  the  current  threat  to  the  United 
States  from  Russian  organized  crime,  which  continues  to  expand  its 
operations  into  this  country,  and  to  discuss  the  part  the  U.S.  Cus- 
toms Service  is  playing  to  meet  this  very  serious  challenge. 

In  1996,  customs  administrations  around  the  world  are  reporting 
a  new  wave  of  criminal  activity,  new  variations  of  money-launder- 
ing and  drug-smuggling  schemes,  and  a  significant  increase  in  com- 
mercial fraud.  This  new  threat  is  real,  and  it  is  immediate.  Its 
source  is  Russian-Eurasian  organized  crime,  and  at  U.S.  Customs, 
we  have  every  reason  to  believe  that  the  danger  posed  by  this 
criminal  organization  will  quickly  increase  in  both  size  and  scope 
unless  law  enforcement  agencies  such  as  ours  undertake  the  con- 
struction of  a  strong  and  effective  counter-offensive. 

The  fall  of  the  Berlin  Wall  in  1989  and  the  subsequent  collapse 
of  the  former  Soviet  Union  have  had  critical  consequences  for  the 
international  community,  which  suddenly  found  itself  dispossessed 
of  the  safeguards  and  formal  agreements  that  had  regulated  the 
production,  use,  storage  and  disposition  of  nuclear  materials  and 
other  weapons  of  mass  destruction  in  the  former  Soviet  Union. 

For  international  organized  crime  groups  and  terrorist  organiza- 
tions around  the  world,  the  sudden  dissolution  of  the  former  Soviet 
Union  translated  into  an  unprecedented  free-for-all,  one  that  of- 
fered access  almost  overnight  to  a  vast  supermarket  of  conven- 
tional weapons,  weapons  of  mass  destruction  and  their  components. 

This  same  upheaval  also  presented  the  international  underworld 
with  unparalleled  opportunities  to  devise  and  deploy  criminal 
schemes  which  not  only  support  but  even  extend  the  capabilities 
and  goals  of  international  drug  smugglers,  money  launderers  and 
illegal  arms  traffickers.  It  is  these  subsidiary  schemes  and  new  op- 
portunities that  are  now  testing  the  resolve  and  the  ingenuity  of 
the  U.S.  Customs  Service. 

At  Customs,  we  believe  this  challenge  demands  a  clear  and  un- 
equivocal response.  Today  we  have  an  uncertain  and  changing  geo- 
political situation,  and  Russian  organized  crime  groups  are  infil- 
trating this  Nation's  commercial  and  economic  institutions  with 
amazing  speed. 

Our  larger  objectives  are  ones  which  we  share  with  other  law  en- 
forcement agencies  at  home  and  abroad.  We  believe  it  is  imperative 


*  The  prepared  statement  of  Mr.  Weise  appears  on  page  100. 


11 

to  prevent  weapons  of  mass  destruction  from  falling  into  the  hands 
of  outlaw  nations,  organized  crime  groups  or  terrorist  bands  inter- 
ested in  orchestrating  catastrophic  attacks. 

We  believe  it  is  necessary  to  employ  the  collective  skills  of  U.S. 
law  enforcement  to  ensure  that  organized  crime  does  not  subvert 
early  efforts  in  Russia  to  introduce  and  sustain  democracy,  and  we 
believe  that  we  must  act  now  to  prevent  the  further  entrenchment 
of  Russian  organized  crime  in  the  United  States. 

The  growth  of  Russian  organized  crime  groups  in  the  United 
States  mirrors  their  emergence  in  countries  around  the  world. 
Many  of  the  organized  crime  groups  in  the  new  republics  are 
known  to  be  associated  with  each  other  and  have  worked  together 
in  the  past. 

The  criminal  groups  that  constitute  the  organizations  we  have 
labelled  Russian  and  Eurasian  organized  crime  are  themselves 
comprised  of  emigres  from  the  former  Soviet  Union.  These  groups 
function  as  parts  of  an  international  network  that  has  well-known 
ties  to  the  Colombian  cartels,  to  the  Italian  mafia,  to  Israeli  orga- 
nized crime,  and  to  other  international  crime  groups. 

While  criminal  cells  or  networks  now  operating  in  the  United 
States  have  been  called,  among  other  things,  "the  Russian  mafia," 
unlike  the  traditional  mafia,  Russian  organized  crime  is  relatively 
unstructured;  there  is  no  well-established  criminal  hierarchy  or 
firm  chain  of  command.  This  absence  of  what  has  typically  been  an 
identifying  feature  for  international  criminal  syndicates  frequently 
makes  it  difficult  for  law  enforcement  agencies  to  tie  specific  crimi- 
nal activities  to  Russian  organized  crime.  Despite  this  difficulty, 
U.S.  Customs  does  have  the  intelligence,  information  and  evidence 
we  need  to  identify  Russian  organized  crime  as  the  perpetrator  in 
a  number  of  dramatic  cases. 

These  cases  involve  narcotics  smuggling,  money  laundering  and 
commercial  fraud — all  crimes  which  fall  within  our  jurisdiction. 

Since  1991,  Customs  has  investigated  approximately  82  cases  in- 
volving Russian-Eurasian  organized  crime.  With  your  permission, 
Mr.  Chairman,  I  would  like  to  take  a  few  minutes  now  to  outline 
three  Customs  cases  that  were  generated  by  Russian  organized 
crime  which  we  think  illustrate  the  dangers  posed  by  this  criminal 
syndicate. 

Before  I  begin,  however,  I  want  to  point  out  that  the  U.S.  Cus- 
toms Service  does  not  investigate  organized  crime  per  se.  We  go 
after  individual  crimes,  and  the  cases  I  am  about  to  discuss  dem- 
onstrate the  ways  in  which  Russian  organized  crime  is  triggering 
Customs  investigations. 

In  June  1991,  New  York  Customs  agents  initiated  an  investiga- 
tion into  possible  heroin  smuggling  activities  by  Russian  organized 
crime.  The  investigation  had  been  triggered  by  the  arrest  of  two 
Russian  couriers  who  had  arrived  at  JFK  International  Airport 
with  3,209  grams  of  heroin  secreted  in  "body  girdles,"  or  what  used 
to  be  called  a  "smuggler's  vest" — something  that  looks  sort  of  like 
this — it  wraps  around  the  midsection,  and  the  drugs  are  contained 
therein. 

As  the  investigation  unfolded,  it  became  clear  that  we  were  deal- 
ing with  an  extensive  network  of  heroin  couriers,  Russian  and 
former  Russian  nationals,  who  were  entering  the  United  States  via 


12 

New  York  and  Boston  on  a  bimonthly  basis.  In  the  end,  Customs 
succeeded  in  dismanthng  a  heroin  smugghng  operation  that  em- 
ployed enough  couriers  and  possessed  enough  heroin  to  supply  the 
entire  East  Coast  of  the  United  States.  And  what  you  see  here  is 
pretty  much  a  schematic  of  the  involvement  of  this  organization, 
where  the  drugs  originated  in  Bangkok,  Thailand,  and  all  of  the 
complex  entry  points. ^ 

The  5-year  investigation  provided  tremendous  insight  into  the  in- 
sular world  of  drug  trafficking  by  the  former  Soviet  Union  criminal 
enterprises  and  illustrated  how  complex  an  investigation  can  be- 
come when  U.S.  law  enforcement  agencies  face  unfamiliar  or  unan- 
ticipated barriers  created  by  a  different  culture  and  language. 

This  joint  Customs-DEA  investigation  concluded  in  1995  with  the 
convictions  of  14  defendants  and  the  seizure  of  approximately  6,000 
grams  of  heroin. 

The  second  case  I  want  to  highlight  today  involves  the  illegal  ex- 
port of  stolen  cars  by  FSU  emigres.  A  good  American  car  is  selling 
anywhere  from  2  to  3  times  its  value  in  the  former  Soviet  Union. 
The  current  cars  of  choice  are  4-wheel  drive  vehicles,  and  as  far  as 
we  can  tell,  the  demand  for  these  vehicles  and  for  other  models,  for 
Mercedes,  Jaguars  and  Oldsmobiles,  remains  high. 

In  this  instance,  our  Customs  investigation  began  with  a  tele- 
phone call  from  Latvian  Customs  to  our  attache  in  Bonn,  Germany. 
Latvian  Customs  was  requesting  information  about  four  American 
vehicles  they  had  seized  on  their  border  with  Belarus.  Our  attache 
in  Bonn  contacted  our  domestic  office  with  the  information  passed 
on  to  him  by  the  Latvians.  The  cars  had  been  stolen  in  New  York 
and  driven  to  Chicago.  In  Chicago,  these  vehicles  were  secreted  be- 
hind false  walls — and  you  can  see  them  depicted  in  these  pic- 
tures— in  containers  that  were  filled  with  mattresses  and  boxes  of 
what  were  listed  in  our  Customs  forms  as  "ordinary  household 
goods."  It  is  not  very  visible  here,  but  in  one  instance,  you  can  ac- 
tually see  that  the  license  plate  is  still  on  the  vehicle. ^ 

The  criminals  who  stole  these  American  cars  attempted  to  export 
them  illegally  from  the  United  States  and  moved  so  quickly  that 
the  license  plate  is  still  visible.  The  one  thing  I  would  say  is  that 
if  anyone  happens  to  be  missing  a  Porsche  with  New  York  vanity 
plates  reading  "ONTHEBID,"  you  can  contact  us  after  the  hearing, 
and  we  will  see  if  we  can  match  you  up  with  the  vehicle. 

Senator  Roth.  Do  you  have  any  estimate  of  how  many  cars  are 
involved  in  this  kind  of  operation? 

Mr.  Weise.  Yes.  We  can  give  you  total  numbers. 

Mr.  Macisco.  For  Russian  organized  crime,  Mr.  Chairman,  ap- 
proximately $25  million  worth  of  automobiles,  and  we  have  made 
77  arrests  involving  Russian  organized  crime  exporting  cars  ille- 
gally from  the  United  States. 

Senator  ROTH.  Thank  you. 

Mr.  Macisco.  The  vehicles  were  worth  approximately  $30,000 
apiece  on  average. 

Mr.  Weise.  A  number  of  arrests  have  been  made  in  this  case,  in- 
cluding the  organizer  and  leader  of  this  group,  who  was  once  the 


^The  document  referred  to  was  marked  Exhibit  No.  1  and  can  be  found  on  page  73. 
2  Pictures  referred  to  appear  on  pages  116  and  11700. 


13 

bodyguard  for  Monya  Elson,  a  notorious  organized  crime  figure  in- 
volved in  the  import  and  distribution  of  heroin  in  New  York.  This 
former  bodyguard  had  been  shot  and  wounded  in  New  York  after 
breaking  ranks  with  Elson,  and  he  subsequently  fled  to  Chicago. 

It  is  important,  however,  to  understand  that  despite  the  occa- 
sional disagreements  between  the  leaders  of  the  Russian  syndicate, 
they  continue  to  mount  a  unified  effort  to  create  a  criminal  system 
in  which  various  activities,  drug  smuggling,  illegal  exports,  money 
laundering,  reinforce  one  another  and  feed  the  emerging  Russian 
criminal  cartel. 

So  far,  as  was  just  indicated,  U.S.  Customs  has  recovered  stolen 
vehicles,  luxury  cars,  and  construction  equipment  valued  at  more 
than  $25  million.  We  have  also  made  77  arrests  with  regard  to  this 
type  of  criminal  activity. 

The  last  case  I  would  like  to  brief  you  on,  Mr.  Chairman,  focuses 
on  the  kind  of  investigation  that  Customs  does  into  the  illegal  sale, 
export  and  diversion  of  weapons  and  their  components.  While  Cus- 
toms has  not  yet  discovered  a  direct  link  between  these  investiga- 
tions and  Russian/Eurasian  organized  crime,  I  want  to  touch  on  the 
case  I  am  about  to  describe  for  two  reasons — first,  because  I  think 
it  illustrates  the  wide  range  and  international  scope  of  the  cases 
that  Customs  is  called  on  to  investigate,  and  second,  because  I 
think  this  case  documents  a  criminal  scenario  that  is  inherently  at- 
tractive to  organized  crime  groups  and  which  as  such  may  be 
adopted  at  any  time  by  Russian  organized  crime. 

The  Customs  case  originated  with  our  resident  agent-in-charge, 
our  RAC  office  in  Newark,  and  our  success  was  due  largely  to  the 
efforts  of  Special  Agent  Eric  Caron,  who  is  standing  to  my  right, 
who  began  the  investigation  with  one  small  piece  of  seemingly  in- 
significant information  and  carried  it  to  a  successful  conclusion. 

The  investigation  involved  a  Newark,  New  Jersey-based  com- 
pany, Electrodyne  Systems,  which  was  defrauding  the  United 
States  Department  of  Defense  by  importing  Russian-made  avionics, 
satellite  communications,  radar  and  radio  components,  and  selling 
the  equipment  to  the  United  States  under  military  contracts  as 
U.S. -made  parts  and  equipment. 

Two  defendants,  who  are  emigres  from  Russia  and  Iran,  have 
been  indicted  for  allegedly  defrauding  the  Department  of  Defense. 
In  addition  to  the  fraudulent  imports,  the  United  States  company 
was  exporting  U.S.  defense  technology,  blueprints  and  designs  to 
Russia  and  Ukraine  without  an  export  license,  so  that  companies 
there  could  manufacture  the  avionics  and  equipment  to  U.S.  speci- 
fications. 

Interestingly  enough,  this  was  the  first  instance  where  Customs 
has  focused  on  the  illegal  export  of  blueprints  and  designs  as  op- 
posed to  the  export  of  actual  items  or  equipment.  As  you  know, 
U.S.  defense  contracting  regulations  prohibit  the  manufacture  of 
U.S.  weapons  systems  components  by  overseas  companies,  and  for 
good  reason. 

Foreign  companies  that  manufacture  equipment  frequently  ob- 
tain classified  plans  and  information,  and  in  situations  where  these 
foreign  companies  may  be  front  companies  for  organized  crime,  ter- 
rorist organizations  or  pariah  states,  the  consequences  may  be  far- 
reaching. 


14 

As  far  as  we  can  tell,  in  this  case  our  interests  were  compromised 
to  the  extent  that  the  Department  of  Defense,  specifically  the  Unit- 
ed States  Navy,  might  have  lost  millions  of  dollars  by  purchasing 
substandard  product  components  intended  for  installation  within 
our  national  defense  systems  if  Customs  had  not  stepped  in. 

The  real  danger  in  this  instance,  however,  turns  on  the  potential 
risk,  on  the  possibility  that  the  Russian  companies  that  manufac- 
tured the  components  for  which  our  Government  had  contracted 
might  have  used  or  sold  the  classified  specifications  sent  to  them 
by  the  U.S.  contractor  to  terrorist  or  pariah  states. 

In  this  case,  we  cannot  be  certain  that  the  classified  information 
and  specifications  forwarded  to  Russia  and  the  Ukraine  were  not 
passed  on  to  other  individuals  or  organizations.  Moreover,  we  also 
know  that  it  is  possible  if  one  has  this  information  to  reconstruct 
a  prototype  of  our  classified  defense  systems  based  on  the  analysis 
of  a  single  component. 

This  particular  case  involved  smuggling,  violations  of  U.S.  export 
control  laws,  and  commercial  fraud,  all  of  which  placed  it  firmly 
within  our  Customs  jurisdiction.  At  Customs,  we  believe  that  we 
have  a  responsibility  in  this  country  to  erect  the  kinds  of  safe- 
guards and  enforcement  mechanisms  that  will  preclude  foreign 
manufacturers  fi-om  obtaining  what  now  appears  to  be  easy  access 
to  classified  information,  plans  and  blueprints  for  technology  criti- 
cal to  the  national  security  of  the  United  States. 

The  risks  that  I  am  outlining  today,  Mr.  Chairman,  remain  inter- 
national in  their  dimensions  and  impact,  and  they  will  continue  to 
require  a  high  level  of  cooperation  and  mutual  assistance.  Cur- 
rently, the  U.S.  Customs  Service  has  Customs  Mutual  Assistance 
Agreements  with  26  nations.  These  are  agreements  we  entered  into 
to  share  information  and  to  work  cooperatively  with  our  counter- 
parts in  these  foreign  countries.  Since  1992,  relations  with  the 
State  Customs  Committee  of  the  Russian  Federation  have  been 
greatly  expanded  and  intensified.  A  new  Customs  Mutual  Assist- 
ance Agreement  was  concluded  in  1994  and  signed  during  a  sum- 
mit meeting  between  Presidents  Clinton  and  Yeltsin  in  September 
of  that  year.  The  Director  General  of  Russian  Customs,  his  senior 
staff,  and  the  12  directors  of  the  regional  customs  administrations 
have  all  visited  the  United  States,  and  several  reciprocal  visits 
have  occurred  or  are  being  planned. 

Russian  Customs  sent  representatives  to  our  Seminar  on  Nuclear 
Smuggling  in  September  of  1995,  and  they  also  sent  representa- 
tives to  a  U.S. -Russian  Preventive  Enforcement  Technical  Work- 
shop in  March  of  this  year. 

Our  working  relationship  with  Russian  Customs  is  expected  to 
grow  significantly  with  the  opening  of  an  office  in  Moscow  later 
this  year,  and  we  believe  that  the  involvement  of  Russian  Customs 
in  our  nonproliferation  interdictions  and  investigations  is  critical  to 
our  future  success.  Both  sides  view  such  work  as  a  national  prior- 

ity. 

We  are  also  providing  a  significant  level  of  training  and  other 
relevant  assistance  to  Russian  Customs.  Last  September,  U.S.  Cus- 
toms conducted  a  Train-the-Trainer  program  in  St.  Petersburg, 
Russia.  The  objective  of  this  program  was  to  further  develop  Rus- 
sian Customs  training  infrastructure  by  increasing  the  number  of 


15 

qualified  training  instructors.  This  specific  course  focused  on  train- 
ing related  to  border  interdiction. 

As  I  speak  today,  another  Customs  training  team  is  getting 
ready  to  travel  to  Moscow  this  weekend  in  order  to  conduct  a  simi- 
lar Train-the  Trainer  course. 

Senator  ROTH.  Mr.  Weise,  I  would  ask  that  you  try  to  summarize 
so  we  can  move  on  to  the  other  witnesses.  We  will,  of  course,  put 
your  entire  statement  in  the  record. 

Mr.  Weise.  Absolutely,  Mr.  Chairman. 

I  would  conclude,  then,  at  this  point,  Mr.  Chairman,  and  I  do  ap- 
preciate the  important  work  the  Subcommittee  has  done.  I  have  no 
doubt  that  with  your  continuing  support  and  interest,  the  U.S. 
Customs  Service  can  meet  the  challenge  quickly  and  effectively.  We 
remain  determined,  in  cooperation  with  the  Departments  of  Treas- 
ury, State,  Justice,  Defense,  Energy,  Commerce,  the  intelligence 
community  and  our  foreign  counterparts  to  promote  global  security 
through  enhanced  border  initiatives. 

Thank  you  very  much,  Mr.  Chairman. 

Senator  ROTH.  Thank  you,  Mr.  Weise. 

Mr.  Moody? 

TESTIMONY  OF  JAMES  E.  MOODY,i  DEPUTY  ASSISTANT  DIREC- 
TOR, CRIMINAL  INVESTIGATIVE  DIVISION,  FEDERAL  BU- 
REAU OF  INVESTIGATION 

Mr.  Moody.  Thank  you  very  much,  Mr.  Chairman.  On  behalf  of 
Director  Freeh  and  myself,  I  would  like  to  thank  you  and  the  Sub- 
committee Members  for  inviting  me  today. 

Concerning  Eastern  European  organized  crime,  there  are  some 
positive  aspects  and  some  negative  aspects  that  we  see  today.  A 
positive  aspect  for  the  FBI  is  the  fact  that  we  have  established 
Eastern  European  crime  as  a  sub-program  of  the  organized  crime 
program  in  June  1991.  At  that  time,  we  began  to  try  to  establish 
an  intelligence  base  on  the  problem  that  was  beginning  to  appear 
here  in  the  United  States  based  upon  a  crime  survey  that  we  con- 
ducted in  late  1990  and  early  1991. 

The  second  positive  aspect  is  the  relationship  we  have  estab- 
lished with  European  and  Eastern  European  law  enforcement  to 
address  this  crime  problem,  for  instance,  the  positive  relationship 
that  we  have  established  with  the  Russian  Ministry  of  Interior 
since  February  1993.  We  are  trying  to  build  lines  of  defense  in  Eu- 
rope for  this  crime  problem  that  is  facing  us  here  in  the  United 
States,  and  we  would  like  to  address  the  crime  problem  as  far  away 
from  the  United  States  as  possible. 

We  are  doing  this  through  liaison  relationships  with  law  enforce- 
ment in  Europe  and  in  Eastern  Europe,  and  we  are  also  doing  this 
through  training  exercise  that  we  are  doing  in  Eastern  Europe, 
based  upon  money  provided  by  Congress.  For  instance,  in  fiscal 
year  1995,  we  trained  over  4,400  law  enforcement  officers  in  East- 
ern Europe. 

The  negative  aspects  of  the  problem,  as  we  see  it,  are  that  they 
are  expanding  in  the  United  States  and  internationally  much  faster 
than  we  anticipated.  The  organized  crime  groups  are  using  inter- 


iThe  prepared  statement  of  Mr.  Moody  appears  on  page  120. 


16 

national  borders  and  sovereignty  issues  for  protection  in  their  ille- 
gal activities,  and  this  is  often  quite  difficult  to  overcome. 

A  second  major  negative  aspect  is  their  ability  to  network  with 
other  organized  crime  groups  internationally.  This  makes  them  one 
of  the  fastest-growing  organized  crime  threats  that  we  have  seen. 

I  have  a  few  charts  that  I  would  like  to  show  you  today  to  give 
you  an  example  of  what  we  are  experiencing  here  in  the  United 
States.  The  first  chart  ^  is  actually  the  results  of  our  census  in 
1990,  which  shows  you  the  demographics  in  the  United  States  of 
where  we  have  significant  ethnic,  Russian  and  Eurasian  popu- 
lations. It  shows  where  the  majority  of  the  Russian,  Eurasian  and 
ethnic  people  are  situated  in  the  United  States,  and  it  comes  to 
about  2.9  million  individuals. 

I  want  to  emphasize  as  the  Chairman  did  this  morning  that  only 
a  small  percentage  of  any  ethnic  groups  of  any  nationality  is  crimi- 
nal, and  an  even  smaller  percentage  can  be  identified  as  organized 
crime.  But  historically  in  the  United  States,  the  way  that  organized 
crime  comes  into  our  country  is  that  it  first  establishes  itself  in  its 
own  ethnic  neighborhoods  for  protection,  because  they  feel  com- 
fortable, and  because  they  prey  upon  the  other  emigres  to  the  Unit- 
ed States,  and  they  prey  upon  the  fact  that  most  newcomers  into 
the  United  States  do  not  want  to  come  to  law  enforcement  for  help; 
they  have  a  fear  of  that. 

The  next  chart  ^  I  want  to  show  you  dramatically  shows  some  dif- 
ferent things.  For  instance,  this  shows  the  number  of  field  offices 
we  have — and  field  offices  are  our  major  offices  in  the  United 
States — the  number  of  field  offices  that  we  have  with  ongoing  in- 
vestigations of  Eastern  European  organized  crime.  Thirty-six  out  of 
56  of  our  field  offices  have  ongoing  investigations.  That  is  a  far  cry 
from  the  68  total  investigations  that  we  had  identified  in  our  crime 
survey  back  in  1990  and  1991.  In  fact,  at  this  time,  we  have  132 
ongoing  organized  crime  cases,  and  we  have  more  than  215  inves- 
tigations that  we  are  working  with  the  Russian  authorities. 

The  next  two  charts  ^  will  show  you  the  Eastern  European  orga- 
nized crime  groups  that  we  have  identified  here  in  the  United 
States,  including  their  leaders.  There  is  a  total  of  26  of  those 
groups.  Now,  I  have  testified  before  Congress  in  the  past  that  we 
have  more  than  30  groups  in  the  United  States.  This  is  a  new  fig- 
ure that  we  are  providing  today,  and  it  shows  you  how  the  problem 
is  evolving  in  the  United  States.  Although  Eastern  European  orga- 
nized crime  is  our  fastest-growing  problem,  the  evolution  of  orga- 
nized crime  from  Eastern  Europe  is  still  in  its  infancy  stage  of  mat- 
uration. The  groups  continue  to  vie  for  dominance,  some  groups  are 
consolidating,  and  some  groups  are  disappearing. 

The  last  chart  "*  depicts  the  Eastern  European  organized  crime 
groups  that  are  active  in  the  United  States  and  where  they  are  lo- 
cated. The  reason  why  this  chart  is  significantly  different  from  the 
one  that  shows  where  our  field  offices  are  located  is  kind  of  un- 
usual to  me.  You  will  see  that  they  are  not  really  locating  in  their 


^  The  document  referred  to  was  marked  Exhibit  No.  6  and  can  be  found  on  page  84. 
2  The  document  referred  to  was  marked  Exhibit  No.  7  and  can  be  found  on  page  85. 
^The  documents  referred  to  was  marked  Exhibit  No.  8  and  can  be  found  on  page  86. 
^  The  document  referred  to  was  marked  Exhibit  No.  9  and  can  be  found  on  page  88. 


17 

ethnic  neighborhoods,  so  this  is  a  change  from  the  historical  aspect 
of  organized  crime  as  we  see  it  here  in  the  United  States. 

The  organized  crime  groups  continue  to  be  involved  in  their  tra- 
ditional organized  crime  activities,  such  as  extortion,  protection 
rackets,  drugs,  illegal  gambling,  arson,  and  murder.  But  there  is  a 
second  group  of  individuals  that  we  are  facing  here  in  the  United 
States  coming  out  of  Eastern  Europe,  and  we  like  to  describe  them 
as  the  "fraudster."  Senator  Cohen  earlier  this  morning  gave  the  ex- 
amples of  the  "rolling  labs"  and  the  Smushkevich  brothers.  These 
are  the  kinds  of  "fraudsters"  that  we  are  experiencing  and  are  in- 
volved very  much  in  economic  fraud,  insurance  fraud,  money  laun- 
dering, health  care  fraud.  Medicare  fraud,  and  fuel  excise  tax 
fraud. 

In  the  United  States  today,  along  the  East  Coast,  we  have  both 
traditional  Eastern  European  organized  crime  activity,  and  we 
have  fraud  activity,  and  the  fraud  activity  on  the  East  Coast  is  pri- 
marily economic  fraud,  money  laundering,  health  care  fraud,  medi- 
cal fraud,  and  fuel  excise  fraud. 

On  the  West  Coast,  we  see  it  a  little  bit  differently.  We  see  more 
"fraudsters"  in  money  laundering,  economic  fraud,  fuel  excise  tax 
fraud,  drugs  and  extortion. 

In  middle  America,  we  see  automobile  theft,  insurance  and 
health  care  fraud,  extortion  and  drugs. 

There  is  a  mixture  between  these  "fraudsters"  and  organized 
crime  groups.  Some  of  the  organized  crime  groups  may  be  involved 
in  fraud;  some  of  the  "fraudsters"  may  be  working  independently, 
but  they  are  associated  with  organized  crime  groups.  So  this  is  an 
eclectic  mix  that  continues  to  evolve  in  the  United  States. 

We  also  see  in  Hawaii  recently  a  new  phenomenon  where  there 
are  lavish  vacations  going  on  over  there  involving  a  lot  of  people 
coming  out  of  Eastern  Europe,  spending  just  thousands  and  thou- 
sands of  dollars  during  their  vacations.  We  see  them  beginning  to 
purchase  real  estate  in  Hawaii,  as  we  experienced  a  few  years  ago 
when  the  Japanese  Boryocadan  started  doing  the  same  thing. 

Senator  COHEN.  Is  there  any  left? 

Mr.  Moody.  They  have  the  money;  they  keep  increasing  the 
prices. 

So  in  summary,  that  is  what  we  see  occurring  here  in  the  United 
States.  I  would  again  like  to  thank  you  for  inviting  us  here  today, 
and  I  would  be  happy  to  answer  any  questions  later. 

Senator  Roth.  Thank  you,  Mr.  Moody. 

Mr.  Federico? 

TESTIMONY  OF  EDWARD  L.  FEDERICO,  JR.,i  DIRECTOR,  NA- 
TIONAL OPERATIONS  DIVISION,  CRIMINAL  INVESTIGATION, 
INTERNAL  REVENUE  SERVICE 

Mr.  Federico.  Thank  you,  Mr.  Chairman,  Members  of  the  Sub- 
committee. 

What  makes  IRS  so  uniquely  qualified  and  well-studied  in  this 
area  is  that  we  have  been  investigating  organized  crime  and  send- 
ing high-level  organized  criminals  to  jail  for  over  77  years. 


^  The  prepared  statement  of  Mr.  Federico  appears  on  page  140. 


18 

Nearly  everyone  has  heard  of  the  famous  Al  Capone.  While  the 
Capone  investigation  was  certainly  not  our  largest  nor  our  most 
complex,  it  is  a  perfect  example  of  what  we  do.  When  more  conven- 
tional investigative  techniques  fail,  we  begin  to  follow  the  money 
trail.  The  proceeds  of  crime  in  our  experience  always  lead  to  the 
criminal. 

Special  agents'  combination  of  accounting  and  law  enforcement 
skills  have  been  essential  qualities  in  conducting  investigations 
which  have  led  to  the  conviction  of  high-profile  criminals  who  com- 
mit increasingly  sophisticated  financial  crimes  in  both  legal  and  il- 
legal activities. 

Today  we  are  here  to  address  the  phenomenon  of  Russian  orga- 
nized crime,  and  as  the  Chairman  so  eloquently  stated,  we  are 
using  the  term,  "Russian  organized  crime"  to  cover  a  myriad  of 
groups  from  the  former  Soviet  Union. 

In  order  to  combat  organized  crime,  one  must  have  a  thorough 
understanding  of  the  criminals  involved.  This  has  been  particularly 
true  of  our  efforts  to  combat  motor  fuel  excise  tax  evasion  schemes 
that  have  been  referenced  here  this  morning. 

We  have  identified  some  significant  characteristics  of  the  Rus- 
sian organized  criminal  in  this  newly-established  criminal  enter- 
prise. They  display  a  remarkable  aptitude  for  sophisticated  white 
collar  crime.  They  are  ruthless,  emplo3dng  threats,  intimidation 
and  violence  to  further  their  aims.  They  are  very  adaptable.  They 
are  not  monopolistic.  They  are  very  fluid. 

These  characteristics  are  particularly  true  of  those  individuals 
involved  in  motor  fuel  excise  tax  schemes  investigated  by  the  IRS. 
What  started  out  as  a  novel  fraud  scheme  contrived  on  Long  Island 
quickly  evolved  into  a  billion  dollar  a  year  compliance  problem  for 
us  and  for  the  Nation. 

Initially,  gasoline  was  the  product  of  choice.  Gasoline  excise  tax 
revenues  constitute  almost  70  percent  of  the  approximately  $20  bil- 
lion in  motor  fuel  excise  taxes  collected  annually  by  our  Govern- 
ment. To  give  you  an  idea  of  the  money  involved,  an  average  tank- 
er truck  holds  8,000  gallons  of  gasoline.  The  combined  Federal  and 
State  taxes  per  gallon  can  exceed  40  cents,  so  the  average  tax  per 
tanker  is  $3,200. 

The  complicated  "daisy-chain"  schemes  devised  by  the  Russians 
puts  that  $3,200  per  tanker  into  their  pockets  instead  of  into  the 
pockets  of  the  United  States  Treasury. 

Senator  RoTH.  May  I  make  sure  I  understand  the  correct  figure? 
The  total  amount  of  taxes  is  $20  billion  a  year  on  gasoline? 

Mr.  Federico.  Gas  and  diesel  and  other  motor  fuel;  yes,  sir. 

Senator  ROTH.  And  $1  billion  of  that  is  absconded  with  through 
these  scams? 

Mr.  Federico.  That  is  correct. 

Senator  RoTH.  Five  percent. 

Mr.  Federico.  Yes,  sir.  Now,  we  have  made,  as  I  will  state  later 
in  my  testimony,  some  very  proactive  changes  to  the  law  that  have 
corrected  the  problem. 

To  say  that  these  daisy  schemes  are  complicated,  well-planned 
and  well-organized  would  be  an  understatement;  yet  they  can  be 
unraveled,  and  vve  have  been  doing  that  successfully  for  the  past 
10  years.  I  would  like  to  briefly  explain  the  most  prevalent  type  of 


19 

scheme  that  the  organized  criminal  is  using,  and  that  is  the  daisy 
chain. 

To  briefly  demonstrate  the  complexity  of  this  scheme,  I  would 
like  to  direct  your  attention  to  the  chart  ^  that  has  been  placed  to 
your  lefl:.  The  "daisy  chain  scheme"  is  the  method  which  was  devel- 
oped by  organized  crime  expressly  for  the  purpose  of  stealing  Fed- 
eral and  State  fuel  excise  tax  revenue.  This  scheme  capitalizes  on 
the  weaknesses  of  our  motor  fuel  excise  tax  law. 

In  the  typical  daisy  chain  operation  such  as  the  one  depicted  on 
this  chart,  which  was  actually  used  in  a  courtroom  in  Philadelphia, 
a  complex  paper  trail  of  motor  fuel  transactions  was  created.  At 
some  point  along  the  chain,  the  sale  was  fictitiously  invoiced  as 
tax-paid  fuel.  But  the  company  supposedly  claiming  to  have  paid 
the  tax  turned  out  to  be  a  fictitious  entity,  or  an  entity  with  no  as- 
sets. This  is  what  we  call  the  "burn"  company,  which  is  the  bottom 
company  reflected  on  the  chart. 

By  the  time  the  auditors  or  the  investigators  unraveled  the  series 
of  transactions  to  determine  the  true  tax  liability,  the  so-called 
"burn"  company  has  disappeared  without  a  trace  of  the  records  or 
the  assets. 

For  such  an  operation  to  work,  the  perpetrator  must  be  able  to 
purchase  and  sell  fuel  tax-free.  In  the  case  of  the  Federal  excise 
tax,  this  means  having  a  registration  number  assigned  by  the  IRS 
on  a  Form  637.  Legitimate  registration  numbers  have  been  ob- 
tained for  fraudulent  purposes  by  buying  out  registered  companies 
or  falsifying  documents  of  legitimate  companies.  Sufllce  it  to  say 
that  this  single  particular  scheme  defrauded  the  Federal  Govern- 
ment and  the  State  of  Pennsylvania  out  of  $14.8  million. 

Another  example  of  the  daisy  chain  scheme  was  in  Newark.  We 
called  this  the  "Red  Daisy"  scheme.  We  used  an  ambitious  under- 
cover operation  to  expose  organized  crime  influence  in  the  fuel 
business  in  New  York,  New  Jersey  and  Pennsylvania,  orchestrated 
and  executed  by  Russian  emigres  under  the  direction  of  a  tradi- 
tional mob  boss  named  Tony  Morelli.  Morelli  was  a  captain  in  the 
Gambino  crime  family  and  was  sentenced  this  year  to  20  years  in 
prison  for  his  leadership  role. 

The  first  phase  of  this  2-part,  multi-year  investigation  focused  on 
a  scheme  which  defrauded  the  Federal  and  State  governments  of 
$60  million  in  fuel  excise  taxes.  In  this  scheme,  members  of  the 
Russian  "mafia"  paid  tribute  to  members  of  New  York's  organized 
crime  families,  including  John  Gotti. 

Our  undercover  agents  became  so  influential  in  the  bootleg  fuel 
industry  that  mobsters  warned  them  to  join  their  operation;  get  out 
of  the  business;  or  suffer  the  consequences.  This  threat  became  re- 
ality when  the  building  being  operated  by  the  undercover  agents 
was  burned  to  the  ground.  This  operation  was  a  joint  operation 
with  the  FBI  and  the  IRS. 

The  second  indictment  of  the  Red  Daisy  was  announced  August 
8,  1995.  It  charged  25  corrupt  fuel  dealers,  along  with  members  of 
both  traditional  and  Russian  organized  crime,  with  the  theft  of 
over  $140  million  in  Federal  motor  fuel  excise  tax  revenue.  This 


1  The  document  referred  to  was  marked  Exhibit  No.  10  and  can  be  found  on  page  89. 


20 

case  is  currently  awaiting  trial,  and  we  have  determined  that  it  is 
the  largest  tax  evasion  case  in  our  history. 

Fuel  excise  tax  hurts  not  only  the  Federal  and  State  govern- 
ments by  depriving  them  of  revenue,  but  has  a  profound  negative 
impact  on  legitimate  fuel  distributors  and  retailers.  Their  market 
shares  erode,  their  profits  decline,  and  some  of  them  are  even 
forced  out  of  business.  They  cannot  compete  with  the  criminals. 

The  next  chart  ^  dramatically  illustrates  the  impact  of  Russian 
organized  crime  on  a  particular  market  segment,  in  this  case  the 
State  of  Pennsylvania.  Beginning  in  June  1990,  you  can  see  a  dra- 
matic decline  in  taxable  gallons  of  diesel  fuel  reported  in  the  State. 
The  decline  and  corresponding  loss  of  revenue  was  not  reversed 
until  June  1992.  The  Criminal  Investigation  Division  increased  its 
efforts  to  target  criminal  organizations  in  major  metropolitan  areas 
at  this  time.  In  the  fall  of  1992,  our  efforts  began  to  produce  dra- 
matic results.  The  evidence  gathered  was  used  to  obtain  warrants 
to  search  hundreds  of  locations  across  the  Nation. 

Literally  tons  of  documents  and  $15  to  $20  million  in  assets  were 
seized.  The  evidence  made  possible  a  series  of  indictments  began 
in  March  1993. ^  But  as  you  can  clearly  see  on  the  chart,  the  reve- 
nue began  to  recover  almost  immediately.  ^ 

You  may  be  wondering  how  this  could  happen — how  could  crimi- 
nals be  infiltrating  our  excise  tax  systems?  In  the  1980's,  the  major 
oil  companies  sold  many  of  their  brand  name  service  stations  and 
fuel  terminals  in  the  New  York  metropolitan  area.  Many  were  sub- 
sequently acquired  by  members  of  various  immigrant  groups, 
among  them  immigrants  from  the  former  Soviet  Union.  When  the 
potential  of  motor  fuel  excise  tax  schemes  was  recognized  by  orga- 
nized crime,  the  Russians  were  in  an  ideal  position  to  sell  bootleg 
gasoline  at  the  stations  they  controlled. 

During  1984  through  1988,  gasoline  schemes  abounded.  They 
were  large  schemes  taking  years  to  investigate  using  traditional 
methods.  In  1988,  legislative  reforms  moved  the  point  of  taxation — 
this  is  a  very  important  point  to  us,  sir — on  gasoline  from  the 
wholesale  distributor  level  to  the  terminal  rack,  substantially  mak- 
ing it  possible  for  us  to  improve  compliance. 

Den3ring  the  ability  to  steal  gasoline  excise  tax  revenue,  the  Rus- 
sians quickly  began  to  organize  instead  diesel  fuel  evasion 
schemes.  Because  the  demand  for  diesel  fuel  is  much  less  than  gas- 
oline, the  Russians  were  forced  to  expand  their  organizations  from 
New  York  into  New  Jersey,  Pennsylvania,  Georgia  and  Ohio,  as 
well  as  other  previously  unaffected  areas. 

The  diesel  fuel  evasion  problem  worsened  from  1988  to  1991.  In 
1993,  Congress  passed  the  Omnibus  Budget  Reconciliation  Act  of 
1993.  The  Act  moved  the  point  of  taxation  for  diesel  fuel  from  the 
wholesale  distributor  level  to  the  terminal  rack.  Further,  this  legis- 
lation provided  that  only  dyed  fuel  is  exempt  from  tax  after  Janu- 
ary 1,  1994  and  that  dyed  fuel  cannot  be  used  on  the  highway. 

Formerly,  fuel  used  for  tax-exempt  purposes  was  not  distinguish- 
able from  the  taxed  product  itself.  This  made  diversion  of  the  prod- 
uct for  illegal  purposes  a  simple  matter.  Dyed  fuel,  by  contrast,  is 


'The  document  referred  to  was  marked  Exhibit  No.  11  and  can  be  found  on  page  90. 
2  The  document  referred  to  was  marked  Exhibit  No.  12  and  can  be  found  on  page  91. 


21 

exempt  from  the  tax,  and  because  of  its  vivid  red  coloring,  any  at- 
tempted use  of  it  on  our  highways  can  readily  be  discoverable  by 
IRS  Examination  Division  personnel  through  spot  checks  at  the 
terminals  and  on  the  trucks. 

This  legislative  remedy,  however  simple  as  it  may  seem,  has  pro- 
duced significant  increases  in  compliance. 

Has  the  legislation  been  effective?  My  answer  is  yes.  As  a  result 
of  these  important  legislative  changes  and  our  investigative  suc- 
cesses. Federal  diesel  fuel  receipts  increased  during  calendar  year 
1994  by  $1.7  billion.  This  gave  us  a  net  revenue  increase  into  the 
Treasury  of  $681  million.  State  revenues  across  the  Nation  have 
also  risen. 

Is  the  problem  fixed?  Not  yet.  I  think  that  sometimes,  a  picture 
is  worth  a  thousand  words,  as  the  saying  goes.  This  is  gasoline. 
This  is  what  they  started  trying  to  bootleg  and  sell  tax-free.  When 
that  failed,  and  we  corrected  the  problem,  they  moved  to  diesel 
fuel. 

I  mentioned  the  djdng.  This  is  what  happens  when  they  dye  the 
fuel,  and  the  inspectors  are  looking  for  this  in  the  trucks.  But  now 
what  are  they  doing?  They  are  moving  to  this.  This  is  what  is 
called  on  the  street  or  in  the  vernacular  "junk."  This  "junk"  is 
cocktailed  fuel.  It  is  taking  the  good  diesel  fuel  being  run  in  our 
trucks  and  gasoline  that  is  being  run  in  our  motor  vehicles,  and  it 
is  being  combined  with  such  things  as  waste  oil,  transmix,  toxic 
waste,  and  other  products.  By  doing  this  mixing,  they  are  extend- 
ing the  volume  of  the  taxable  fuel. 

Excise  taxes  are  not  paid  on  this  extended  volume.  Criminals  are 
selling  these  substandard  and  dangerous  products  to  unsuspecting 
retail  dealers  and  to  motorists  in  many  parts  of  the  country.  They 
are  clogging  up  the  engines,  and  worse  yet,  they  may  be  polluting 
the  air. 

But  the  reason  I  am  here  is  not  to  talk  about  environmental  pro- 
tection; it  is  to  talk  about  crime.  This  last  chart  summarize  some 
of  the  most  important  and  significant  indictments  that  we  have 
been  able  to  hand  down  for  the  period  1993  through  August  1995. 

Senator  Roth.  Could  you  summarize,  because  our  time  is  lim- 
ited? 

Mr.  Federico.  Certainly.  Quickly,  what  this  shows  is  that  we 
have  been  able  in  these  specific  cases  to  indict  136  individuals  who 
were  involved  in  tax  loss  investigations  that  totalled  over  $363  mil- 
lion. 

I  do  not  want  to  leave  you  with  the  impression  that  the  IRS  is 
only  concerned  with  the  effect  of  the  fuel  business.  We  now  have 
special  agents  actively  involved  in  joint  investigations  with  the 
Customs  Service  and  with  the  FBI  regarding  narcotics,  health  care 
fraud,  insurance  fraud,  prostitution,  diversion  of  assets  acquired 
from  Russia,  and  so  on.  We  are  also  working  with  greater  coopera- 
tion internationally.  We  have  IRS  teaching  financial  investigation 
techniques  courses  to  Russian  personnel  from  the  various  regions 
of  the  former  Soviet  Union. 

We  are  also  instructing  at  the  International  Law  Enforcement 
Academy  in  Budapest,  and  in  fact,  our  Commissioner  just  recently 
participated  in  the  dedication  ceremonies  for  this  academy  in  April. 


22 

We  are  also  working  on  the  assessment  teams  for  the  Russian 
banking  system  and  helping  to  make  recommendations  to  improve 
that  system,  including  new  money  laundering  legislation. 

Finally,  we  are  working  with  the  MVD  as  partners,  and  they 
have  invited  us  to  send  and  place  an  agent  in  Moscow,  which  we 
are  currently  considering. 

Thanks  for  your  attention. 

Senator  ROTH.  Thank  you,  Mr.  Federico. 

It  is  now  my  pleasure  to  call  on  Deputy  Minister  Kozhevnikov. 
I  want  to  say  again,  Mr.  Minister,  how  much  we  appreciate  your 
being  here,  and  we  are  looking  forward,  all  of  us,  to  your  testi- 
mony. Please  proceed. 

TESTIMONY  OF  IGOR  NIKOLAYEVICH  KOZHEVNIKOV,i  DEPUTY 
MINISTER  OF  INTERIOR,  RUSSIAN  MINISTRY  OF  INTERIOR 
AFFAIRS 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  Allow  me  to  ex- 
press my  gratitude  for  this  opportunity  to  share  with  you  my  vision 
of  the  aforementioned  issue. 

An  analysis  of  the  situation  shows  that  the  process  of  criminal- 
ization has  now  attacked  some  of  the  more  critical  areas.  This  is 
an  ongoing  situation,  and  this  represents  a  threat  to  our  mutual 
security. 

We  can  see  a  growth  of  regional  separatism,  and  we  can  see  that 
this  monstrous  process  has  shown  results  in  Chechnya  and  is  a 
tragedy  not  only  for  Chechnya  but  for  other  countries. 

We  have  seen  a  reform  of  the  economy  which  is  perhaps  not  all 
that  comprehensible  for  much  of  society,  according  to  experts,  in 
view  of  the  high  concentration  of  capital  in  the  hands  of  private 
citizens.  This  has  not  only  deepened  social  inequality  within  soci- 
ety, but  has  made  for  a  more  desperate  struggle  within  the  econ- 
omy with  the  organized  crime  sector. 

So  that  of  2.5  million  persons  who  are  working  on  officially  reg- 
istered crimes,  59  percent  are  qualified  by  the  criminal  law.  We 
have  a  number  of  criminal  structures  in  participation.  This  is  al- 
lowed under  Russian  law.  We  see  "pyramids"  which  involve  mil- 
lions of  our  people.  Many  of  these  people  are  not  greedy,  but  people 
are  simply  participating  in  these  p3rramids  hoping  to  protect  their 
savings. 

Now  we  have  a  new  flow  of  immigrants.  We  have  refugees  com- 
ing into  Russia,  and  this  allows  these  newcomers  to  increase  the 
number  of  criminals  in  our  country. 

We  can  see  all  the  dangers  of  the  legal  system,  and  we  realize 
that  we  have  to  work  on  our  legal  system.  At  the  current  time,  our 
Parliament  is  working  on  a  project  dealing  with  organized  crime, 
and  we  want  to  come  up  with  new  drafts  which  would  allow  us  to 
improve  our  legal  system.  We  are  introducing  a  number  of  very 
crucial  changes  into  our  law,  and  we  hope  that  by  the  beginning 
of  1997,  we  will  be  able  to  apply  in  practice  the  new  legal  system 
which  we  are  currently  introducing. 

I  would  like  to  give  you  some  figures  on  crime  in  Russia.  Last 
year,  if  we  look  at  the  number  of  crimes,  we  see  a  4.7  percent  in- 


*The  prepared  statement  of  Mr   Kozhevnikov  appears  on  page  156. 


23 

crease  over  1994,  59  percent  of  which  are  quahfied  as  grave  of- 
fenses. 

Two-thirds  of  the  officially  registered  crimes  are  of  mercenary 
nature,  the  number  of  thefts,  armed  robberies  of  citizens'  homes, 
vehicle  drivers,  collectives,  currency  exchanges  significantly  in- 
creased. 

During  the  past  year,  main  efforts  of  the  Russian  law  enforce- 
ment agencies  were  focused  on  accomplishing  tasks  held  by  the 
Federal  program  on  enhancing  crime  fighting. 

The  number  of  solved  crimes  has  increased.  Persons  responsible 
for  837,000  grave  offenses  have  been  identified.  In  order  to  reim- 
burse damage  from  illegal  activity,  forfeitures  of  illegal  acquired 
property  and  valuables  totalled  1.5  trillion  rubles.  At  the  same 
time,  every  fourth  crime,  two-thirds  of  armed  robberies,  and  most 
of  the  contract  murders  remain  unsolved. 

During  the  last  year,  a  set  of  measures  on  suppressing  activity 
of  criminal  groups  engaged  in  drug  trafficking  has  been  imple- 
mented. The  growth  of  drug-related  crimes  has  been  noted  in  al- 
most all  regions  of  Russia.  Compared  to  1985,  they  have  increased 
by  4.8  times. 

Illegal  production  of  controlled  substances  continues  to  develop. 
The  manufacture  of  drugs  in  underground  laboratories  has  become 
a  significant  factor  of  their  illegal  production  and  growth.  However, 
a  more  dangerous  tendency  is  currently  a  rapid  enhancement  of 
drug  smuggling  to  Russian  territory. 

More  than  half  of  all  confiscated  controlled  substances  are  of  for- 
eign origin.  Almost  all  of  such  dangerous  and  expensive  drugs  as 
cocaine,  opium,  heroin,  synthetic  drugs  quickly  filling  the  Russian 
market  are  shipped  from  abroad  by  smuggling  channels.  Only  the 
customs  agencies  of  the  Russian  Federation  have  made  764  appre- 
hensions of  drug  traffickers,  almost  twice  more  than  in  1994,  which 
led  to  forfeiture  of  6.5  tons  of  narcotics. 

The  analysis  of  crimes  relating  to  large  shipments  of  drugs  dem- 
onstrates that  about  25  percent  of  persons  responsible  for  them  are 
citizens  of  the  former  republics  of  the  USSR.  They  bring  into  Rus- 
sia up  to  30  percent  of  illegally  circulating  narcotics.  Most  of  the 
drug  traffickers  are  citizens  of  Ukraine,  Kazakhstan,  Azerbaijan, 
Lithuania  and  the  Central  Asian  States. 

There  has  been  an  increase  in  illegal  shipments  of  drugs  from 
the  countries  of  the  so-called  "far  abroad."  These  are  primarily 
opium  from  Afghanistan,  shipped  through  Tadjikistan,  Kyrgyzstan, 
Turkmenistan,  Uzbekistan,  and  also  cocaine  from  Colombia,  Peru 
and  the  United  States,  heroin  from  the  Golden  Triangle  States,  and 
controlled  medical  substances  from  India.  Transit  of  drugs  through 
Russia  to  Western  Europe  has  become  increasingly  active. 

Aggregate  estimation  of  development  of  the  above  tendencies  al- 
lows us  to  make  a  conclusion  that  Russian  has  become  a  target  of 
international  drug  trafficking  expansion  of  Russian  criminal  drug 
trafficking  groups. 

Let  me  say  a  few  words  now  on  the  situation  with  regard  to  ille- 
gal attempts  to  seize  or  get  control  of  radioactive  materials.  Theft 
is  one  of  the  most  dangerous  types  of  crimes  connected  with  illegal 
trafficking  of  radioactive  materials.  Twenty-seven  of  such  crimes 
were  committed  in  1993,  16  in  1994,  and  5  in  1995.  As  a  rule,  they 


24 

were  committed  by  the  employees  of  the  faciUties  where  theft  of  ra- 
dioactive materials  took  place.  In  90  percent  of  these  cases,  com- 
mon workers  were  responsible  for  such  thefts. 

Circles  of  persons  involved  in  further  resale  have  been  forming 
spontaneously  during  the  search  for  buyers.  That  accounts  for  the 
fact  that  there  are  no  grounds  for  insisting  on  the  existence  of 
mafia-type  organized  criminals  groups  specializing  in  theft  of  radio- 
active materials. 

Analysis  of  the  investigation  documents  demonstrates  that  the 
primary  objective  of  such  criminal  attempts  are  the  sources  of  ion- 
izing radiation  used  in  small  quantities  in  various  industrial  de- 
vices. Some  cases  involved  theft  of  technological  materials  with  iso- 
tope composition  based  on  metal  uranium-238  enriched  to  a  dif- 
ferent extent  by  uranium-235  or  its  derivatives. 

The  above  radioactive  materials  cannot  be  used  in  production  of 
nuclear  weapons  due  to  their  physical  characteristics. 

It  is  essential  to  note  that  during  1994-95,  we  held  several  meet- 
ings with  the  representatives  of  the  United  States  and  German  law 
enforcement  agencies  where  we  agreed  on  the  mechanism  of  joint 
activities  aimed  at  prevention  of  such  crimes. 

I  would  now  like  to  take  a  closer  look  at  the  issues  of  fighting 
organized  crime  in  Russia.  Contemporary  organized  crime  is  a  new 
qualitative  level  of  professional  group  crime.  This  is  reflected  not 
only  in  a  high  level  of  professionalism  and  a  developed  network  of 
corruption  links,  but  also  by  a  broad  scale  of  its  activities  and  influ- 
ence exerted  on  a  considerable  number  of  branches  in  the  national 
economy  and  power  structure. 

During  the  last  3  years,  units  of  the  Russian  Ministry  of  Internal 
Affairs  elicited  about  22,000  organized  crime  groups  with  different 
extents  of  cohesion,  with  more  than  94,000  members.  Almost  every 
sixth  group  was  involved  in  interregional  and  international  activi- 
ties, and  every  tenth  group  had  corruptive  links  with  federal  insti- 
tutions. 

A  violent  struggle  for  the  division  of  spheres  and  territories  of  in- 
fluence was  unleashed  among  criminal  clans.  Just  in  1995  alone, 
this  led  to  183  armed  clashes  leaving  156  persons  murdered  and 
104  wounded. 

Despite  the  difficulty  of  the  criminal  situation,  law  enforcement 
agencies  did  not  lose  control  over  the  ongoing  processes,  but  more- 
over increased  their  capabilities  of  restraining  them.  As  a  result  of 
the  undertaken  measures,  criminal  activities  of  14,000  organized 
groups  were  stopped  during  the  last  3  years.  Charges  were  brought 
against  41,500  leaders  and  participants. 

An  analysis  of  the  available  information  disclosed  a  stable  tend- 
ency of  the  increase  in  the  number  of  Russian  organized  criminal 
groups  engaged  in  illegal  activities  abroad.  According  to  the  pre- 
liminary estimates  of  the  Russian  Ministry  of  Internal  Affairs,  ap- 
proximately 2,000  members  of  110  Russian  criminal  groups  commit 
crimes  in  44  countries  of  the  world.  Out  of  this  number,  approxi- 
mately every  fifth  criminal  group  has  established  links  in  Germany 
and  every  seventh  in  the  United  States. 

According  to  our  data,  about  20  organized  criminal  groups  of 
Russian  origin  are  involved  in  illicit  activities  on  the  territory  of 
the  United  States.  Here,  our  data  probably  coincide  with  what  we 


25 

heard  here  earher.  Their  main  interests  are  concentrated  in  New 
York  City,  Los  Angeles,  and  Miami  and  include  primarily  money 
laundering,  finance  fraud,  racketeering,  drug  trafficking,  and  so  on. 
U.S.  citizens  are  already  becoming  their  victims.  A  number  of 
fraudulent  operations  committed  in  Russia  were  planned  by  immi- 
grants from  the  former  Soviet  Union  on  U.S.  soil. 

Today,  jointly  with  the  FBI,  we  investigate  56  cases  which  in- 
volve over  400  persons  suspected  of  links  with  organized  criminal 
groups,  and  nearly  140  companies  and  organizations  engaged  in 
money  laundering  and  other  illegal  financial  operations. 

Investigation  of  the  Ivankov  criminal  group  case,  the  penetration 
into  the  computer  network  of  Citibank,  the  group  of  international 
swindlers  who  claimed  to  represent  a  U.S. -based  company, 
"NEWTEL"  company,  are  the  most  vivid  and  well-known  illustra- 
tions of  our  interaction.  And  we  would  continue  this  list  if  we  want- 
ed to. 

I  would  like  in  conclusion  to  state  the  following.  The  criminals 
are  uniting,  and  they  pose  a  real  threat  to  the  entire  world  commu- 
nity. Meanwhile,  international  legal  measures  of  extradition  of 
criminals  and  restitution  of  property  or  reimbursed  money  acquired 
by  means  of  illegal  activities  are  currently  insufficient. 

Nowadays,  the  Russian  Federation  is  making  considerable  efforts 
to  establish  an  appropriate  international  legal  basis  for  cooperation 
with  our  foreign  partners.  As  you  know,  we  intend  to  sign  a  broad- 
scale  U.S. -Russian  treaty  on  mutual  legal  assistance  as  soon  as 
possible,  and  that  is  stated  in  the  joint  statement  by  President 
Clinton  and  President  Yeltsin  on  September  28,  1994  on  coopera- 
tion in  the  field  of  law  enforcement  and  crime  fighting  and  in  the 
intergovernmental  agreement  of  1995  between  Gore  and 
Chernomyrdin. 

We  would  like  to  ensure  that  these  intentions  be  rapidly  imple- 
mented. I  thank  you  for  your  attention. 

Senator  ROTH.  We  thank  you,  sir,  for  your  very  helpful  testi- 
mony. We  will  have  some  questions  for  you  in  just  a  few  minutes. 

First,  Commissioner  Weise,  in  your  testimony,  you  mentioned 
that  the  Department  of  Defense  was  defrauded  by  material  that 
was  built  on  stolen  intellectual  property  and  was  inadequate. 

Could  you  tell  me  how  wide  or  how  broad  are  these  kinds  of  inci- 
dents? Do  you  have  a  sense  of  how  widespread  a  practice  this  is? 

Mr.  Weise.  It  is  difficult  to  quantify  at  this  point.  I  think  this 
was  the  most  significant  case  of  its  type  that  we  had  where  it  actu- 
ally was  not  stolen  materials,  and  perhaps  I  did  not  explain  it  well 
enough.  The  company,  Electrodyne,  entered  into  a  Government  con- 
tract with  the  United  States  Government,  and  they  were  properly 
authorized  to  produce  these  products.  But  as  in  effect  a  cost-saving 
move,  what  they  did  was  subcontract — they  sent  the  blueprints  and 
plans  abroad  to  some  of  these  states  which  were  not  supposed  to 
have  these  kinds  of  materials,  significantly  reduced  the  cost  of  pro- 
duction, so  to  speak,  but  also  created  great  risks  in  terms  of  our 
national  security.  It  is  the  first  of  its  kind,  of  that  type  of  investiga- 
tion, that  we  have  had.  We  have  done  a  number  of  other  specific 
investigations  relating  to  national  security,  attempting  to  export 
products  that  are  not  supposed  to  go  out  of  this  country  that  are 
highly  sensitive,  but  this  was  the  first  of  that  kind  of  case  where 


26 

they  actually  sent  out  the  blueprints  to  be  manufactured  by  in  ef- 
fect a  subcontractor  to  a  company  that  entered  into  an  actual  con- 
tract with  the  Government. 

We  cannot  really  quantify  the  number  of  cases.  For  the  record, 
we  will  try  to  give  you  the  number  of  cases  like  this  in  which  we 
have  been  involved,  but  it  is  hard  to  say  how  broad  a  problem  this 
is  at  this  point.  ^ 

Senator  RoTH.  You  also  mentioned  in  your  written  statement 
that  Russian  organized  crime  is  investing  its  assets  in  real  estate. 
Again,  how  widespread  is  that  practice?  What  kind  of  real  estate 
are  they  buying?  And  are  they  also  investing  in  businesses,  like 
more  traditional  organized  crime  has? 

Mr.  Weise.  Yes,  and  I  believe  one  of  the  other  witnesses  alluded 
to  some  of  the  investments  that  are  taking  place  in  Hawaii.  Like 
any  other  organized  crime  group  or  any  large  crime  group,  they 
need  to  launder  the  proceeds,  the  money,  and  they  are  doing  it  for 
that  reason  as  well  as  to  create  some  semblance  of  legitimacy  to 
be  able  to  prosper,  not  only  continuing  money  laundering,  but  con- 
tinuing a  foundation  for  their  criminal  enterprise. 

Again,  we  do  not  have  specific  numbers  on  the  total  number  of 
investments  by  Russian  organized  crime,  but  it  is  a  growing  trend, 
and  one  that  I  think  we  are  seeing  in  all  of  the  law  enforcement 
organizations  represented  here,  a  new  problem  that  is  developing 
and  growing. 

Senator  ROTH.  You  also  mentioned  in  your  testimony  that  Rus- 
sian organized  crime  groups  in  the  United  States  are  laundering 
money  for  the  Colombian  drug  cartels.  Can  you  explain  how  these 
two  organizations  are  collaborating? 

Mr.  Weise.  Well,  I  do  not  want  to  go  into  the  specifics;  we  can 
perhaps  provide  some  of  that  outside  of  the  public  arena.  But  one 
of  the  things  that  has  really  struck  us  about  the  flexibility  of  the 
Russian  organized  crime  is  that  they  are  very  adept  at  dealing  with 
the  other  existing  organizations,  such  as  the  Cali  cartel,  the  people 
in  Colombia,  the  Italian  mafia  and  others.  They  are  very  flexible 
and  fluid,  and  there  seems  to  be  some  acceptance  on  the  part  of 
some  of  these  other  organizations  of  Russian  criminals  as  not  nec- 
essarily a  threat,  but  as  persons  whom  they  can  work  with.  And 
we  can  talk  to  you  about  some  of  the  specifics  that  we  found  in 
some  of  our  investigations  off  the  record. 

Senator  RoTH.  Mr.  Moody,  as  I  understand  it,  Russian  organized 
crime  presents  some  unique  language  and  cultural  challenges  to 
law  enforcement.  How  well-equipped  is  the  FBI  in  these  areas  to 
adequately  investigate  organized  crime?  For  example,  are  you  able 
to  effectively  translate  wiretaps,  run  undercover  operations,  and  as- 
sist local  police  in  these  matters? 

Mr.  Moody.  We  have  a  very  difficult  time  keeping  up  with  that. 
We  address  it  through  FBI  agents  who  do  speak  the  language — and 
we  have  an  insufficient  number  of  them.  We  also  contract  linguists 
on  a  case-by-case  basis,  and  we  quite  often  have  a  difficult  time 
doing  that,  identifying  those  who  want  to  work  for  us  and  identify- 
ing those  who  will  travel  to  where  we  have  the  need.  This  is  a  con- 
tinuing problem  that  we  have  all  the  way  across  all  organized 


'The  document  referred  to  was  marked  as  Exhibit  No.  14  and  can  be  found  on  page  97. 


27 

crime  lines  right  now,  especially  in  the  Spanish  language,  the  dif- 
ferent Chinese  languages,  dialects,  Japanese,  and  all  those  coming 
out  of  Eastern  Europe.  This  is  a  continuing  problem  throughout 
law  enforcement  right  now. 

Senator  Roth.  Has  any  effort  been  made  to  use  law  enforcement 
officials  from  other  countries  who  have  needed  language  abilities? 

Mr.  Moody.  Yes,  sir,  in  fact,  we  have.  Various  countries  have  as- 
sisted us  quite  often  in  doing  that.  Due  to  some  of  the  rules  that 
you  work  under  whenever  you  are  doing  electronic  surveillance,  it 
is  quite  often  difficult,  but  there  are  procedures  that  you  can  set 
up  to  allow  them  to  assist  you  on  a  wiretap  or  a  microphone.  Gen- 
erally, they  help  us  post-recording  and  go  through  the  recordings 
to  assist  us.  In  fact,  we  have  had  quite  a  bit  of  assistance  from  the 
Russian  MVD;  in  fact,  some  of  their  officers  have  actually  been 
here  in  the  United  States  and  testified  before  grand  juries,  and  we 
are  anticipating  they  are  going  to  be  testifying  at  some  trials  soon. 

Senator  RoTH.  Mr.  Moody,  I  understand  that  the  criminal  groups 
in  the  former  Soviet  Union  are  said  to  be  much  more  structured 
than  the  Russian  groups  here  in  the  United  States.  How  do  you  ex- 
pect the  Russian  criminal  groups  to  evolve  over  time? 

Mr.  Moody.  We  see  the  Russian  groups,  the  Eastern  European 
groups,  establishing  themselves  not  only  in  Russia  but  throughout 
Eastern  Europe  and  the  United  States,  and  it  depends  quite  often 
on  each  individual  organization.  For  instance,  we  see  them  estab- 
lishing themselves  in  Austria  and  in  some  of  the  Western  Euro- 
pean countries  and  here  in  the  United  States,  based  upon  an  indi- 
vidual leader. 

I  anticipate,  based  on  25  years  in  organized  crime,  that  we  are 
going  to  continue  to  see  them  evolve  and  build  more  structured  or- 
ganizations, and  that  a  lot  of  the  organizations  that  we  see  today 
will  fall  by  the  wayside;  they  will  either  be  destroyed  in  fights  for 
territory,  or  they  will  be  absorbed  by  some  of  the  stronger  groups. 
And  as  they  become  more  structured,  they  will  set  up  various  co- 
ordinating mechanisms,  like  the  Cosa  Nostra  here  in  the  United 
States. 

In  fact,  we  are  beginning  to  pick  up  some  intelligence  at  this 
time  that  they  are  beginning  to  coordinate  their  activities  inter- 
group,  internationally,  at  this  time. 

Senator  ROTH.  Thank  you. 

Mr.  Federico,  as  you  pointed  out,  we  have  passed  some  legisla- 
tion that  has  significantly  helped  the  situation  but  has  not  entirely 
eliminated  it.  What  more  do  you  think  we  can  do  here,  particularly 
in  the  Congress,  to  help  address  the  problem  of  fuel  tax  fraud? 

Mr.  Federico.  One  of  the  issues  currently  before  you  involves 
kerosene.  Kerosene  currently  is  not  a  taxed  fuel.  Kerosene  at  times, 
though,  is  being  utilized  to  what  we  call  "blend."  Like  I  pointed  out 
with  the  cocktailing,  blending  increases  the  volume. 

What  is  before  you  right  now  for  your  consideration  is  to  impose 
a  tax  similar  in  amount  to  the  diesel  fuel  tax  for  kerosene;  this 
likewise  would  be  taxed  at  the  terminal  rack,  and  that  could  great- 
ly assist. 

Also,  as  far  as  a  direct  law  enforcement  need  for  the  IRS  is  a  bill 
that  is  currently  pending  as  part  of  the  tax  reform  bill  that  Senator 
Pryor  has  introduced  that  involves  "churning."  This  gives  the  IRS 


28 

authority  to  use  any  quote-unquote  "profit"  that  it  earns  during  an 
undercover  operation  to  be  used  back  in  that  operation  to  help  with 
the  budget  of  that  particular  operation.  That  is  under  consideration 
right  now  by  the  Senate. 

Senator  ROTH.  Your  testimony  mentioned  that  bootlegging  of 
motor  fuel  over  State  lines  continues  to  be  a  major  problem. 

Mr.  Federico.  Yes,  Senator.  As  we  started  to  correct  the  issue 
of  a  Federal  tax,  moving  it  back  from  the  wholesaler  or  the  retailer 
to  the  terminal  rack,  that  really  took  the  wind  out  of  their  sails, 
if  you  will.  What  we  are  finding  going  on  now  is  that  they  are  buy- 
ing gas  or  diesel  fuel  in  low-tax  States,  moving  that,  bootlegging  it, 
trucking  it,  to  high-tax  States,  and  then  selling  it  there;  and  there- 
fore the  profit  margin  would  be  the  difference  between  the  two 
taxes.  That  is  one  of  the  issues  that  is  going  on. 

The  other  way  of  bootlegging  we  have  found  is  to  move  the  gaso- 
line or  diesel  fuel  from  foreign  countries  such  as  Canada  and  bring- 
ing it  into  the  United  States  and  applying  for  a  rebate  of  the  tax 
in  Canada,  then  selling  it  at  the  higher  price  here  in  the  United 
States,  saving  the  tax,  naturally. 

Senator  ROTH.  Deputy  Minister  Kozhevnikov,  you  mentioned 
that  criminal  groups  in  Russia  have  sent  their  associates  to  the 
United  States  to  establish  companies  that  ship  illegal  drugs  and 
weapons  to  the  former  Soviet  Union.  Do  you  have  any  specific  evi- 
dence of  that? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  Yes,  I  do  have 
some  specific  instances  where  we  have  managed  to  discover  such 
instances;  I  do  have  specific  data  on  that. 

Senator  ROTH.  And  is  that  true  of  weapons  as  well  as  drugs? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  No.  This  would  be 
drugs. 

Senator  RoTH.  Mr.  Minister,  you  are  no  doubt  familiar  with  the 
trial  in  this  country  of  the  Russian  criminal  leader,  Ivankov.  How 
powerful  was  this  man  in  Russia,  and  why  did  he  leave  your  coun- 
try to  come  to  the  United  States? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  We  think  Mr. 
Ivankov  was  basically  trying  to  escape  arrest  in  our  country,  and 
he  felt  the  United  States  would  provide  a  safe  haven. 

As  far  as  Ivankov  is  concerned,  he  was  a  prominent  leader  of  or- 
ganized crime  in  Russia;  he  was  a  hardened  professional  thief  who 
was  very  respected  by  his  colleagues.  They  have  a  special  title  for 
people  like  that;  he  has  the  special  distinction  of  being  what  is 
called  a  "legal  thief."  It  is  a  special  title,  meaning  a  hardened,  high- 
level  criminal.  And  Ivankov  evidently  realized  that  his  arrest  was 
imminent,  and  that  is  why  he  chose  to  attempt  to  leave  Russia. 

We  worked  on  this  particular  case  together  with  the  FBI.  We 
sent  200  persons  here  to  work  on  the  operation.  I  hope  that  the 
trial  in  court  will  be  successful  in  its  conclusion. 

Senator  RoTH.  Mr.  Minister,  some  hockey  players  from  the 
former  Soviet  Union  who  play  professionally  in  the  United  States 
have  become  victims  of  extortion.  Is  this  also  a  problem  in  the 
former  Soviet  Union,  where  these  players  often  visit  and  still  have 
families? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  I  would  not  say 
that  our  professional  athletes  are  a  particular  problem  inasmuch  as 


29 

on  Russian  territory,  for  example.  We  do  have  individual  incidents, 
but  we  do  have  incidents  of  extortion  not  only  of  athletes,  but  of 
a  number  of  persons  who  have  considerable  financial  wherewithal. 
But  I  would  not  say  that  this  is  a  particular  problem  with  regard 
to  athletes  specifically.  That  is  my  opinion,  an3^way. 

Senator  Roth.  I  will  ask  you  one  further  question,  Mr.  Minister. 
You  testified  about  the  theft  of  radioactive  material  from  facilities 
in  the  former  Soviet  Union.  You  also  testified  that  this  was  not  ma- 
terial that  could  be  used  for  manufacturing  nuclear  weapons.  Are 
there  any  cases  where  material  or  intellectual  property,  has  been 
stolen  or  sold,  to  your  knowledge? 

Mr.  KOZHEVNIKOV  [Interpreted  from  Russian].  Well,  we  have  the 
federal  security  system.  That  is  their  purview,  actually;  that  is 
their  bailiwick.  I  am  unable  to  provide  you  with  the  appropriate  in- 
formation in  that  regard  because  I  do  not  have  the  facts  at  hand. 

Senator  Roth.  Thank  you. 

Senator  Lieberman? 

Senator  LlEBERMAN.  Thank  you,  Mr.  Chairman,  and  thank  you, 
gentlemen  from  the  U.S.,  and  thank  you,  Minister  Kozhevnikov,  for 
the  cooperation  of  the  MVD  with  Arnerican  law  enforcement  and 
for  taking  the  time  to  be  with  us  this  morning. 

Let  me  begin  with  a  general  question.  In  the  private  sector,  when 
a  new  business  comes  in  to  compete  with  an  existing  business,  ei- 
ther the  market  expands,  or  the  existing  business  goes  out  of  busi- 
ness or  diversifies  and  goes  into  something  else. 

So  here,  with  a  whole  new  generation  of  organized  criminals  and 
so-called  Russian  organized  crime  families  or  groups  coming  in,  I 
am  wondering  what  you  would  say  has  been  the  reaction  of  the  ex- 
isting illegal  business  groups,  the  existing  organized  crime  families. 
Are  some  of  them  going  into  other  areas,  or  do  we  have  a 
generational  change  happening  where,  in  a  sense,  the  children  now 
go  into  legitimate  businesses,  and  that  is  the  end  of  that  operation, 
or  is  just  the  market  expanding? 

Mr.  Moody,  do  you  want  to  start? 

Mr.  Moody.  What  we  see  is  that,  for  instance,  the  gas  tax  fraud 
really  started  with  the  American  La  Cosa  Nostra.  What  we  see 
happening  today  is  that  the  La  Cosa  Nostra  will  basically  franchise 
the  operation  to  the  Russian  groups  and  get  a  kickback  in  all  this, 
so  that  everybody  makes  money. 

We  do  not  see  Russian  groups  coming  in  and  trying  to  vie  and 
fight  for  territory  with  other  organized  crime  groups.  They  enter 
into  cooperative  agreements.  There  is  enough  money  out  there  to 
be  stolen  by  everybody,  and  they  share  the  profits. 

Senator  LlEBERMAN.  Mr.  Federico  or  Mr.  Weise,  does  that  con- 
form to  your  perception  of  what  is  happening? 

Mr.  Federico.  That  conforms  exactly  to  what  we  have  seen.  As 
Mr.  Moody  said,  the  Italian  mafia,  if  you  will,  in  New  York  started 
the  idea  of  the  daisy  chain  that  we  described.  They  then  used  the 
abilities  of  the  Russians  who  had  purchased  the  retail  service  out- 
lets, and  that  was  a  perfect  forum  for  the  Russians  to  get  into  that. 
They  pay  tribute  to  each  other  and  in  fact  share  the  illegal  profits. 

Mr.  Weise.  I  do  not  have  anything  to  add  to  that,  Senator. 

Senator  LlEBERMAN.  So  the  age  of  mergers  has  reached  illegal  ac- 
tivities as  well  as  legal  activities  in  this  country,  but  apparently 


25-049  0-96-2 


30 

without  the  same  effects  of  downsizing  that  occur  in  the  private 
sector. 

Mr.  Federico.  It  is  much  more  efficient. 

Senator  LiEBERMAN.  It  is  much  more  efficient,  and  the  employ- 
ment opportunities  continue  to  be  vigorous. 

Mr.  Moody.  Very  much  so;  they  are  expanding,  not  downsizing. 

Senator  LiEBERMAN.  In  that  regard,  I  was  interested  in  your  tes- 
timony, Mr.  Weise,  about  the  interception  that  Customs  has  done 
of  heroin  and  other  illegal  drugs  which  have  been  transshipped 
through  the  former  Soviet  Union  and  the  former  Warsaw  Bloc. 

First,  do  you  have  a  sense  of  how  significant  a  proportion  of  the 
drugs  coming  into  the  United  States  are  coming  through  this  so- 
called  Russian  organized  crime  network?  We  tend  to  think  of  the 
drugs  coming  in  most  significantly  from  Latin  America,  although  I 
know  it  is  more  complicated  than  that. 

Mr.  Weise.  It  is  difficult  to  quantify  at  this  point,  Senator,  but 
I  would  say  at  this  point  it  is  very  small  in  terms  of  total  percent- 
age, but  it  is  growing  and  growing  at  a  fairly  fast  pace. 

Senator  LiEBERMAN.  Were  you  tipped  off  in  the  case  that  you  de- 
scribed by  law  enforcement  authorities  from  the  former  Soviet 
Union  or  Warsaw  Bloc  countries  as  to  the  transshipment  of  illegal 
drugs,  or  was  that  discovered  here  at  point  of  entry? 

Mr.  Weise.  We  have  various  cases  that  are  working,  but  that  one 
particular  case,  we  did  have  some  undercover  information,  and  we 
have  had  cooperation  with  other  law  enforcement  organizations  in 
the  former  Soviet  Union. 

Senator  LiEBERMAN.  And  am  I  correct,  hearing  your  testimony, 
in  saying  that  the  level  of  that  cooperation  with  law  enforcement 
in  the  former  Soviet  Union  is  going  up  and  is  becoming  more  exten- 
sive? 

Mr.  Weise.  Yes. 

Senator  LiEBERMAN.  I  wanted  to  get  to  a  point  related  to  that. 
Senator  Roth  mentioned  in  his  opening  comments  that  there  is  not 
an  extradition  treaty  that  now  exists  between  the  United  States 
and  Russia.  I  assume  that  it  would  be  helpful  to  your  efforts,  gen- 
tlemen, if  such  a  treaty  existed.  Am  I  correct  in  that? 

Mr.  Moody.  Senator,  when  we  first  started  out,  there  were  no 
treaties  at  all.  The  example  Mr.  Federico  used  of  the  gas  tax  fraud 
in  Philadelphia,  when  that  case  was  indicted,  there  were  five  indi- 
viduals who  fled  back  to  Eastern  Europe.  Two  of  them  fled  to  Rus- 
sia, two  fled  to  the  Ukraine,  and  I  do  not  know  where  the  fifth  one 
went.  At  that  point,  I  contacted  my  counterpart  in  the  MVD  and 
asked  him  for  assistance  in  Russia  to  arrest  David  Shuster  and 
Dmitry  Belokopytov,  and  they  did.  They  arrested  for  us  those  two 
individuals  and  put  them  on  an  airplane  flying  directly  back  into 
the  United  States,  with  FBI  agents  abroad,  so  that  we  could  then 
arrest  them  here  in  the  United  States. 

At  the  same  time,  the  two  individuals  who  fled  to  the  Ukraine 
heard  about  it,  and  since  the  Russian  authorities  were  shot  at 
when  they  went  out  to  arrest  Shuster  and  Belakopytov,  and  there 
was  a  little  physical  restraint  of  these  two  individuals,  well,  the 
two  individuals  in  the  Ukraine  voluntarily  came  back. 

Senator  LiEBERMAN.  They  were  made  an  offer  they  could  not 
refuse. 


31 

Mr.  Moody.  Yes,  sir.  The  Russian  authorities  did  a  very  good  job. 
When  my  FBI  agent  showed  up  and  talked  to  Mr.  Shuster,  he  said 
that  he  was  bringing  him  back  to  the  United  States  for  arrest,  and 
if  he  gave  him  any  problem,  he  was  going  to  leave  him  in  Russia; 
and  Shuster's  response  was,  "There  will  be  no  problem." 

From  that  position,  we  have  gone  on,  and  today,  we  have  a  legal 
agreement  that  has  been  signed  by  Vice  President  Gore  and  Vice 
Premier  Chernomyrdin,  and  we  are  working  toward  a  mutual  legal 
assistance  treaty.  I  believe  that  we  really  need  to  have  that  mutual 
legal  assistance  treaty  which  would  cover  all  of  this. 

Senator  Lieberman.  So  it  is  not  a  formal  extradition  treaty,  but 
there  now  is  a  legal  agreement  that  has  been  achieved  at  the  Gore- 
Chernomyrden  level,  and  we  are  moving  toward  that. 

Mr.  Moody.  Yes,  sir. 

Senator  LlEBERMAN.  It  is  very  interesting  that  the  movement  of 
the  criminals  once  identified  is  not  only  as  it  was  in  the  case  of  Mr. 
Ivankov  that  you  described  from  the  former  Soviet  Union  here,  but 
also  that  when  indicted  here,  some  of  the  Russian  crime  figures 
have  gone  back  there.  So  it  is  obviously  important  that  we  have 
mutual  extradition. 

I  did  want  to  ask  both  Mr.  Kozhevnikov  and  the  others,  in  the 
case  of  Mr.  Ivankov,  did  you  know  when  he  was  heading  to  the 
United  States?  Were  you  able  to  track  him  at  that  time?  And  then 
I  want  to  ask  the  Americans  here  how  did  he  gain  entry  into  the 
United  States? 

Mr.  Moody.  If  I  may  add.  Senator,  we  are  not  exactly  sure  how 
he  gained  entry  into  the  United  States.  The  Russian  authorities 
told  us  he  was  coming  and  that  he  came  into  the  United  States. 
We  are  not  exactly  sure.  We  know  he  went  in  and  out  of  the  United 
States  a  number  of  times.  The  Russian  authorities  told  us  about 
him  and  basically  where  he  was  located  and  enabled  us  to  start 
targeting  him  for  investigation,  which  ultimately  led,  with  their  co- 
operation, to  his  indictment.  I  believe  he  goes  on  trial  this  month. 

When  we  arrested  him,  I  believe  we  found  him  with  seven  dif- 
ferent passports  in  seven  different  names.  That  gives  you  some 
idea  of  what  we  are  facing  internationally  today  with  the  rapid 
communication  systems,  with  the  rapid  ability  to  travel  inter- 
nationally, and  with  the  counterfeiting — or  a  lot  of  these  passports 
are  legitimate  passports  in  a  number  of  different  names — it  is  very 
difficult  to  keep  up  with  these  individuals. 

Senator  RoTH.  Were  they  all  phony  passports,  or  were  they  bona 
fide? 

Mr.  Moody.  Some  of  them  were  legitimate  with  different  names. 

Senator  Lieberman.  So  that  in  other  words,  they  are  unlikely  to 
be  coming  in  under  their  real  names.  I  am  wondering  to  what  ex- 
tent it  would  help  if  in  this  cooperative  relationship  you  have  with 
the  Russian  authorities — well,  the  immigration  officials,  for  in- 
stance, had  a  list  of  the  names  of  organized  Russian  crime  fami- 
lies  

Mr.  Moody.  We  have  received  lists  of  names  from  the  Russian 
authorities  and  have  provided  them  to  Immigration  to  help  keep 
these  individuals  out.  We  have  also  provided  them  to  the  State  De- 
partment as  a  screening  mechanism. 


32 

Senator  LlEBERMAN.  Has  that  had  any  effect  in  the  sense  of  ap- 
prehending any  of  them,  or  are  they  coming  in  mostly  under  as- 
sumed names? 

Mr.  Moody.  If  I  may,  it  has  had  more  of  a  deterrent  effect;  it 
makes  it  a  httle  more  difficult  for  them  to  come  in.  And  there  are 
certain  very  well-known  individuals  who  are  trying  to  come  into 
the  United  States  who  have  been  barred  from  coming  into  the 
United  States. 

Senator  Lieberman.  Very  well-known  as  organized  crime  figures 
in  Russia? 

Mr.  Moody.  Yes,  sir. 

Senator  LlEBERMAN.  And  again,  are  they  attempting  to  come  in 
to  escape  prosecution  in  Russia,  or  are  they  just  coming  in  because 
it  is  better  business?  Mr.  Kozhevnikov? 

Mr.  Kozhevnikov  [Interpreted  from  Russian] .  I  can  say  that  you 
are  correct  when  you  speak  about  the  need  to  exchange  more  infor- 
mation. I  have  in  mind  information  which  each  side  has  at  its  dis- 
posal. We  are  working  with  the  FBI  just  now  to  prepare  a  list  of 
persons  who,  in  our  view,  are  planning  to  move  to  the  United 
States  to  engage  in  criminal  activity,  and  we  intend  to  hand  it  over 
in  the  near  future.  But  we  would  like  also  to  get  similar  informa- 
tion on  former  citizens  who  are  already  here  now  and  have  been 
convicted  so  that  we  might  be  able  to  use  this  information  for  our 
own  purposes. 

On  the  whole,  I  would  say  we  are  moving  in  the  direction  of  clos- 
er cooperation. 

Senator  LlEBERMAN.  That  is  good  news  for  both  sides,  and  I  hope 
it  will  continue.  May  I  ask  you  this  question,  and  you  alluded  to 
it  in  your  testimony.  There  has  been  a  general  impression  given 
that  Russian  organized  crime  figures  here  in  this  country  are  not 
operating,  at  least  at  this  point,  in  a  tightly-structured  organiza- 
tion, that  there  are  more  individual  illegal  entrepreneurs!  Do  you 
have  any  evidence  that  the  Russian  criminal  figures  are  sending 
members  of  their  groups  over  here  to  go  into  this,  and  are  there 
continuing  relations,  economic  or  otherwise,  between  the  crime 
families  in  Russia  and  those  Russian  organized  crime  figures  here, 
or  is  it  totally  a  separate,  independent  operation  in  the  United 
States? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  We  were  speaking 
of  well-known  criminal  families — I  missed  the  beginning  of  that;  I 
did  not  hear  the  soundtrack. 

Senator  LlEBERMAN.  Unfortunately,  the  translation  was  not 
working  earlier.  Let  me  just  ask  the  basic  question  again  very 
briefly.  Is  there  a  connection  between  organized  crime  families  in 
Russia  and  those  that  operate  here  in  the  United  States? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  We  have  at  our 
disposal  preliminary  intelligence  to  the  effect  that  such  contacts 
are  taking  place. 

Senator  LlEBERMAN.  Thank  you. 

I  have  a  final  question  for  the  gentlemen  from  U.S.  law  enforce- 
ment. As  to  the  violence  that  is  being  committed  by  members  of 
Russian  organized  crime,  is  it  as  we  have  become  accustomed  to  ex- 
periencing with  earlier  groups,  primarily  within  the  groups  them- 
selves fighting  for  turf,  or  is  violence  used  against  nonmembers. 


33 

against  the  targets  of  extortion  or  other  criminal  activities  by  Rus- 
sian organized  crime  in  the  United  States? 

Mr.  Moody.  We  see  the  use  of  both.  In  a  case  out  of  Philadel- 
phia, I  believe,  10  Russians  were  killed.  They  were  killing  each 
other  during  that  investigation.  But  we  also  see  in  the  Ivankov  in- 
vestigation that  the  father  of  one  of  the  victims  was  beaten  to 
death  on  a  subway  platform  in  Moscow.  We  see  both  the  use  of  vio- 
lence— they  very  readily  use  violence,  and  they  very  readily  use  vi- 
olence against  law  enforcement. 

Mr.  Federico.  That  is  a  trait  that  I  think  we  have  to  respect  and 
guard  against,  their  willingness  to  use  violence  against  law  enforce- 
ment. 

Senator  LlEBERMAN.  Including  in  the  United  States? 

Mr.  Moody.  I  do  not  know  of  any  specific  example  in  the  United 
States  yet.  We  have  picked  up  intelligence  information  that  it  is 
being  considered. 

Senator  LlEBERMAN.  But  they  have  employed  violence  against 
law  enforcement  within  Russia. 

Mr.  Moody.  Within  Russia,  it  is  a  very  significant  problem,  and 
maybe  he  will  tell  you  about  it — the  number  of  law  enforcement  of- 
ficials who  have  been  killed  in  the  last  few  years. 

Senator  LlEBERMAN.  Am  I  correct  that  that  traditionally  has  not 
been  a  pattern  of  organized  crime? 

Mr.  Moody.  In  the  United  States. 

Senator  LlEBERMAN.  Yes,  in  the  United  States,  that  they  have 
not  used  violence  against  law  enforcement  for  fear  of  reprisals,  I 
presume. 

Mr.  Moody.  That  is  correct;  in  the  United  States,  they  have  not. 

Senator  LlEBERMAN.  So  that  if  these  intelligence  reports  are  cor- 
rect, it  would  be  a  new  and,  to  put  it  mildly,  unsettling,  outrageous 
development  here. 

Mr.  Moody.  Yes,  sir.  We  have  had  discussions  with  certain  of 
these  individuals  about  the  down  sides  of  doing  something  like 
that. 

Senator  LlEBERMAN.  So  you  have  actually  had  informal  but  direct 
warnings? 

Mr.  Moody.  Yes,  sir.  We  have  had  the  same  thing  over  the  years 
with  the  La  Cosa  Nostra. 

Senator  LlEBERMAN.  Thank  you  for  what  you  are  doing.  I  wish 
you  well. 

Thank  you,  Mr.  Chairman. 

Senator  Roth.  Thank  you. 

Senator  Cohen? 

Senator  Cohen.  Thank  you,  Mr.  Chairman. 

I  know  this  panel  has  been  going  on  for  some  time,  and  we  want 
to  release  them  so  we  can  get  to  the  other  panels,  but  I  would  just 
like  to  pose  a  couple  of  thoughts. 

Since  I  have  served  on  this  Subcommittee,  we  have  investigated 
a  variety  of  issues  involving  organized  crime.  We  have  investigated, 
for  example,  the  organization  of  "chop  shops"  in  the  United  States, 
money  laundering  operations,  currency  exchange  operators  along 
our  borders,  professional  boxing,  a  whole  variety  of  areas.  We  have 
found  a  commonality  of  issues  involved  in  each  of  these  cases. 


34 

Number  one,  there  are  big  profits  involved.  Whenever  there  are 
big  profits,  and  on  the  other  side  of  the  equation,  you  have  low 
risk — low  risk  of  detection,  low  risk  of  prosecution,  low  risk  of  con- 
viction and  low  risk  of  sentencing — you  are  going  to  have  a  pro- 
liferation of  activity  in  this  particular  field.  We  have  found  it  in  vir- 
tually every  area  we  have  ever  investigated. 

What  comes  to  mind  as  I  listened  to  the  testimony  this  morning 
is  that  we  have  precisely  the  same  situation  here.  There  is  a  very 
low  rate  of  detection — I  think  you  indicated,  Mr.  Weise,  that  but 
for  the  agent  sitting  behind  you  and  his  picking  up  one  small  piece 
of  information,  that  business  of  Electrodyne  exporting  the  blue- 
prints never  would  have  been  detected. 

That  raises  several  issues  in  my  mind.  First  of  all,  on  the  first 
chart  you  showed,  you  indicated  that  there  were  6,000  grams  of 
heroin  being  smuggled  in,  and  you  said  that  14  people  have  been 
convicted.  My  question  is  what  were  the  sentences  given  out  to 
those  14  individuals  who  were  convicted? 

Mr.  Weise.  We  will  get  you  that  specifically  for  the  record, ^  Sen- 
ator, but  I  am  being  informed  that  it  was  consistent  with  the  Fed- 
eral guidelines  on  each  of  those  kinds  of  cases;  but  we  will  get  you 
that  specifically.  But  your  point  is  well-taken,  that  probably  one 
might  say  it  was  not  severe  enough. 

Senator  COHEN.  Well,  whether  we  are  talking  about  heroin 
smuggling,  auto  theft,  military  equipment  coming  back  into  the 
United  States,  the  question  is  what  are  the  chances  of  it  being  de- 
tected, successfully  prosecuted,  and  if  prosecuted  successfully,  what 
is  the  sentence  going  to  be?  I  raise  this  in  connection  with  Mr. 
Kozhevnikov,  and  I  will  turn  to  him  in  a  moment,  but  I  read  the 
memoirs  of  Natan  Sharansky.  I  assume  that  the  prison  conditions 
and  sentences  in  Mother  Russia  are  not  exactly  "Club  Fed,"  or 
maybe  in  this  case.  Club  Med,  but  in  any  event,  I  assume  that  the 
authorities  in  Russia  do  not  have  Federal  courts  which  oversee  the 
living  conditions,  the  number  of  people  who  serve  in  their  particu- 
lar prisons,  whether  or  not  their  living  conditions  are  up  to  stand- 
ards as  far  as  Federal  standards  are  concerned. 

In  other  words,  we  have  a  situation  where  you  have  people  who 
are  leaving,  organized  crime  figures  who  leave  Russia  to  come  here, 
with  little  prospect  of  being  caught,  detected,  convicted,  and  then 
sentenced  to  what — something  that  is  quite  easy,  I  would  assume, 
by  Russian  standards.  As  I  go  back  and  read  Sharansky's  memoirs 
being  put  away,  is  not  exactly  a  holiday. 

So  I  raise  this  as  an  issue  because  it  seems  to  me — and  you  have 
indicated,  Mr.  Moody,  that  this  is  in  the  initial  stages.  What  is 
going  to  stop  this  tide  from  expanding  if  in  fact  they  keep  looking 
at  the  profit  side,  with  the  low  risk  of  detection  and  prosecution, 
and  then  what  is  the  penalty  going  to  be? 

I  think  it  is  probably  not  feasible,  but  one  might  propose  that  if 
we  have  these  international  links  that  have  been  established,  as 
Senator  Lieberman  was  talking  about,  between  organized  Russian 
gangs  here  and  the  gangs  back  home,  perhaps  we  might  have  a 
policy  of  extradition,  and  if  we  in  fact  apprehend  people  who  are 
violating  our  laws,  and  they  do  have  connections  back  to  the  home- 


'The  response  to  this  question  was  marked  Exhibit  No.  14  and  can  be  found  on  page  97. 


35 

land,  that  we  send  them  there  for  prosecution  and  conviction  and 
sentencing.  That  might  be  a  greater  disincentive  than  we  currently 
have  under  our  own  rules. 

Mr.  Weise,  you  got  my  attention  in  terms  of  Electrodyne  sending 
out  these  blueprints  basically  to  subcontract  to  manufacture  cer- 
tain component  parts  that  go  into  our  military  equipment.  We  have 
all  been  fixated,  and  justifiably  so,  on  the  recent  tragedy  that  oc- 
curred with  one  of  our  commercial  airliners  going  down.  We  have 
had  evidence,  for  example,  that  suspected  unapproved  parts  are 
making  their  way  back  into  the  commercial  airline  industry,  that 
is  cause  for  concern  to  all  of  us.  But  if  you  think  about  the  implica- 
tions of  allowing  parts  to  our  military  equipment  being  factored  out 
or  subcontracted  out,  coming  back  in,  it  would  seem  to  me  to  make 
logical  sense  for  a  foreign  military  or  intelligence  operation  to  in 
fact  encourage  organized  criminal  groups  to  be  manufactured  parts 
to  come  back  into  the  United  States  to  go  into  our  military  equip- 
ment. 

It  would  seem  to  me  you  would  have  a  perfect  marriage  between 
officials  of  another  government  cooperating  with  organized  criminal 
elements  to  achieve  precisely  the  placing  of  defective  or  inferior 
parts  in  your  potential  adversaries'  military  equipment. 

Mr.  Weise.  Senator,  that  is  precisely  the  reason  why  we  included 
that  example  in  our  testimony  notwithstanding  the  fact  that  we  do 
not  have  direct  evidence  of  whether  or  not  it  is 

Senator  COHEN.  But  it  raises  another  issue  as  to  what  we  can 
do  about  it.  For  example,  is  there  any  law  that  would  prohibit  a 
major  military  contractor  in  the  United  States  from  contracting  out 
the  manufacture  of  certain  component  parts  to  established  allies? 
We  know,  for  example,  that  when  we  talk  about  an  American-made 
car,  the  engine  might  come  from  Canada,  the  body  might  come 
from  Mexico,  the  electronics  might  come  from  Japan. 

Now,  we  are  talking  about  a  multinational  defense  contractor.  Is 
there  any  prohibition — you  are  going  to  be  advised  there  in  a  mo- 
ment— is  there  any  prohibition  on  these  multinational  contractors 
from  having  any  of  the  parts  made  in  other  countries  that  are  al- 
lies of  ours? 

Mr.  Weise.  Well,  clearly.  Senator,  you  are  getting  well  beyond 
our  area  of  expertise,  and  yet  what  is  being  whispered  to  me  is  that 
there  are  Department  of  Defense  guidelines,  which  obviously  the 
Department  of  Defense  would  be  much  more  appropriate  to  be  an- 
swering these  questions. 

Senator  COHEN.  Then,  my  follow-up  question  would  be  do  you 
have  any  kind  of  a  liaison  relationship  with  the  Department  of  De- 
fense to  coordinate  your  investigations  with  DOD.  Are  you  able  to 
determine  whether  or  not,  if  it  is  permissible — we  have  what  we 
call  "false  flag"  operations  in  the  business,  an  ally  could  be  manu- 
facturing a  component  part  for  a  piece  of  defense  equipment  which 
in  turn  has  been  compromised  because  that  particular  operation  is 
really  being  run  by  another  organization  by  another  country. 

Mr.  Weise.  And  the  answer  to  your  question  is  we  clearly  con- 
sulted very  closely  with  the  Department  of  Defense,  both  on  these 
matters  and  all  of  our  export  control  responsibilities. 

Senator  COHEN.  OK. 


36 

Mr.  Kozhevnikov,  how  many  police  have  been  murdered  in  Rus- 
sia in  the  last  year  or  so?  Is  it  roughly  500? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  I  think  I  can  give 
you  the  exact  number;  about  278  in  1995.  These  are  persons  who 
were  involved  in  performing  their  formal  obligation. 

Senator  COHEN.  And  do  you  have  any  evidence  of  Russian  politi- 
cal figures  being  either  extorted,  intimidated  or  otherwise  com- 
promised by  organized  crime  groups  in  Russia? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  Well,  if  we  want 
to  speak  about  well-known  political  figures,  we  do  not  have  such 
data  or  information.  If  we  want  to  speak  about  local  authorities, 
yes,  we  can  confirm  that  such  instances  do  take  place. 

Senator  COHEN.  We  know  that  organized  Chechen  groups  that 
operate  in  southern  Russia  are  involved  in  a  produce  inventory  op- 
eration. Do  you  know  whether  any  of  the  Chechen  organized 
groups  operate  in  the  United  States? 

Mr.  Kozhevnikov  [Interpreted  from  Russian].  I  have  no  informa- 
tion on  Chechens  in  the  United  States. 

Senator  Cohen.  Thank  you. 

Thank  you  very  much,  Mr.  Chairman.  I  know  you  are  anxious  to 
move  on. 

Mr.  Moody.  Senator,  we  have  arrested  Chechens  in  the  United 
States. 

Senator  ROTH.  Thank  you. 

Thank  you,  Senator  Cohen,  and  thank  you,  gentlemen,  very 
much.  We  appreciate  your  very  helpful  and  informative  testimony. 

Mr.  Minister,  thank  you  again  for  being  here. 

At  this  time,  I  would  like  to  call  forward  our  next  witness,  Mi- 
chael Franzese,  a  former  captain  in  the  Colombo  organized  crime 
family. 

Mr.  Franzese,  as  you  know,  we  swear  in  all  witnesses  who  ap- 
pear before  this  Subcommittee,  so  would  you  please  rise  and  raise 
your  right  hand? 

Mr.  Franzese.  Yes. 

Senator  Roth.  Do  you  swear  or  affirm  that  the  testimony  you 
will  give  to  this  Subcommittee  will  be  the  truth,  the  whole  truth, 
and  nothing  but  the  truth,  so  help  you,  God? 

Mr.  Franzese.  I  do. 

Senator  ROTH.  Thank  you,  and  please  proceed  with  your  testi- 
mony. 

TESTIMONY  OF  MICHAEL  FRANZESE,i  FORMER  CAPO, 
COLOMBO  ORGANIZED  CRIME  FAMILY 

Mr.  Franzese.  Good  morning,  distinguished  Members  of  the  Sub- 
committee. 

My  name  is  Michael  Franzese,  and  I  have  been  subpoenaed  here 
today  to  address  the  Subcommittee  regarding  my  personal  experi- 
ences with  Russian  organized  crime  in  the  United  States.  I  order 
to  understand  the  extent  of  that  activity,  the  Subcommittee  needs 
to  be  aware  of  my  own  background  and  former  involvement  in  or- 
ganized crime. 


'The  prepared  statement  of  Mr.  Franzese  appears  on  page  162. 


37 

I  was  born  in  Brooklyn,  New  York.  My  father  is  John  "Sonny" 
Franzese,  former  underboss  of  the  Colombo  crime  family,  one  of 
New  York's  five  La  Cosa  Nostra  families.  In  1975,  I  became  a 
"made"  member  of  the  Colombo  family,  in  a  formal  induction  cere- 
mony presided  over  by  then  family  boss,  Thomas  DiBella. 

I  acted  in  the  capacity  of  "soldier"  from  1975  through  1980,  when 
I  was  appointed  a  "Caporegime"  and  given  a  crew  of  soldiers  to  pre- 
side over. 

During  the  years  I  was  a  member,  I  engaged  in  criminal  activity 
on  my  own  behalf  as  well  as  that  of  the  Colombo  family,  such 
criminal  activity  included  tax  fi-aud,  loan  sharking,  gambling,  secu- 
rities fi'aud,  labor  racketeering  and  extortion. 

In  1985,  I  was  indicted  in  the  Eastern  District  of  New  York  for 
various  racketeering  charges.  In  1986,  as  part  of  a  plea  agreement 
with  the  Organized  Crime  Strike  Force  of  the  Department  of  Jus- 
tice, I  pled  guilty  to  2  counts  of  the  28-count  indictment  relating 
to  tax  fraud.  I  accepted  a  10-year  prison  sentence  and  $15  million 
in  fines  and  restitution. 

In  or  about  1987,  while  in  Federal  prison  in  California,  I  decided 
to  sever  my  12-year  relationship  with  the  Colombo  crime  family 
and  organized  crime  in  general.  As  I  address  the  Subcommittee 
here  today,  I  am  no  longer  a  member  of  organized  crime. 

In  early  1980,  while  I  was  a  Colombo  family  soldier,  Lawrence 
lorizzo,  a  major  independent  gasoline  wholesaler  based  in  Long  Is- 
land, New  York,  came  to  me  for  protection.  lorizzo  and  Russian  or- 
ganized crime  figures  working  independently  of  one  another  each 
figured  out  how  to  orchestrate  one  of  the  most  lucrative  Govern- 
ment rip-offs  of  all  time — stealing  gas  tax  money. 

As  you  have  been  told  by  previous  witnesses,  this  was  a  complex 
scam  that,  over  the  years,  has  netted  Italian  and  Russian  orga- 
nized crime  hundreds  and  hundreds  of  millions  of  dollars.  And  the 
Russians  pioneered  and  perfected  these  schemes  to  where  I  under- 
stand it  is  still  going  on  today  despite  changes  in  the  law. 

I  first  got  involved  because  some  mob  figures  were  trying  to 
shake  down  lorizzo.  lorizzo  owned  or  operated  some  300  independ- 
ent gas  stations  throughout  Long  Island  at  that  time.  It  was  a 
cash-heavy  operation.  I  resolved  lorizzo's  problem  by  sending  some 
of  my  men  over  to  let  these  other  mob  figures  know  lorizzo  was 
with  me.  That  ended  lorizzo's  problem.  In  return,  I  became  his 
partner  in  the  wholesale  gasoline  business,  and  this  business  be- 
came an  organized  crime-controlled  operation. 

Later  in  1980,  I  began  working  with  Russians  in  the  gas  tax 
business.  One  of  my  soldiers,  a  guy  named  Vinnie,  had  been  ap- 
proached by  the  Russians  to  help  collect  a  $70,000  debt.  Vinnie's 
job  was  to  say,  "Pay  the  money,  or  I'll  break  your  legs,"  and  to 
sound  convincing,  which  he  was.  My  guy  came  to  me  with  the  Rus- 
sian's offer  to  see  if  I  was  interested.  I  was,  and  so  I  arranged  a 
meeting  with  the  leaders  of  this  Russian  organized  crime  group — 
Michael  Markowitz,  David  Bogatin,  and  Lev  Persits.  These  men 
owned  and  operated  a  wholesale  gasoline  company  in  Brookl3m, 
New  York. 

These  Russians  were  having  trouble  collecting  money  owned 
them.  They  were  also  having  problems  obtaining  and  holding  onto 
the  licenses  they  needed  to  keep  the  gas  tax  scam  going.  I  could 


38 

help  them  on  both  counts.  First,  the  Colombo  family's  reputation 
was  very  effective  in  causing  people  to  pay  their  debts.  Also,  our 
family  had  a  guy  at  the  commissioner  of  revenue's  office  at  the 
State  House  in  Albany  who  could  get  the  necessary  licenses. 

The  Russians  were  eager  to  align  themselves  with  someone  who 
could  resolve  both  problems.  Because  of  my  association  with  orga- 
nized crime,  they  believed  me  to  be  that  person.  As  it  turned  out, 
I  was. 

We  arranged  a  sit-down  on  a  Saturday  morning  in  the  fall  of 
1980  at  a  Mobil  station  they  owned  in  Brooklyn.  The  three  Rus- 
sians told  me  how  they  were  stealing  tax  money  due  the  Govern- 
ment on  the  sale  of  gasoline  and  how  they  often  ran  into  problems 
collecting  some  of  the  illegal  proceeds  from  their  customers. 

We  cut  a  deal  whereby  they  agreed  to  become  part  of  my  organi- 
zation. I  would  provide  them  with  protection  from  the  other  mob 
families  and  the  muscle  to  collect  all  the  money  due  them.  Through 
the  services  of  Lawrence  lorizzo  and  our  gasoline  operation,  they 
would  have  access  to  the  wholesale  licenses  they  needed  to  defraud 
the  State,  county,  and  Federal  Government  out  of  tax  revenue. 

We  agreed  to  share  the  illegal  proceeds,  75  percent  my  end,  25 
percent  their  end.  The  deal  was  put  on  record  with  all  five  crime 
families,  and  I  took  care  of  the  Colombo  family  share  out  of  the  ille- 
gal proceeds  of  my  end. 

Over  the  next  4V2  years,  the  combined  Russian-Iorizzo  organiza- 
tion which  I  controlled  defrauded  the  United  States  Government 
and  the  States  and  counties  of  New  York,  Connecticut,  New  Jersey, 
Pennsylvania  and  Florida  out  of  hundreds  of  millions  of  tax  dollars 
due  on  the  sale  of  gasoline. 

To  give  you  an  idea  how  lucrative  the  gas  tax  business  was,  it 
was  not  unusual  for  me  to  receive  $9  million  in  cash  per  week  in 
paper  bags  from  the  Russians  and  lorizzo.  Our  profits  ran  any- 
where from  2  to  30  cents  per  gallon,  and  at  one  point,  we  were 
moving  400  to  500  million  gallons  per  month.  I  will  leave  it  to  you 
to  do  the  math. 

During  that  time,  I  became  very  closely  involved  with  the  Rus- 
sian group.  I  found  them  to  be  intelligent,  possessing  remarkable 
business  instincts  that  they  would  not  hesitate  to  use  for  illegal 
gain.  As  a  result  of  their  experiences  living  in  Communist  Russia, 
they  have  little  respect  for  United  States  law  and  little  fear  of 
American  prisons. 

They  would  fi-equently  approach  me  with  other  illegal  business 
ventures  and  were  eager  to  share  in  illegal  deals  I  would  propose 
to  them,  such  as  loan  sharking,  insurance  fraud  and  securities 
fraud. 

One  of  the  business  ventures  we  jointly  entered  into  was  bujdng 
a  bank  in  Austria.  The  purpose  of  this  transaction  was  to  be  able 
to  use  this  bank  to  finance  other  organized  crime  ventures.  I  in- 
vested $10  million  from  my  end  of  the  illegal  gas  tax  profits  in  this 
bank. 

Including  the  money  invested  by  the  Russians,  the  bank  had  a 
total  of  $80  to  $100  million  in  assets.  Bogatin  later  went  to  Austria, 
where  he  played  an  active  role  in  operating  this  bank.  Additionally, 
lorizzo  created  a  slush  fund  from  Federal  gas  tax  money,  which  he 


39 

kept  in  this  Austrian  bank.  That  account  accumulated  $15  milhon 
when  the  Government  seized  it  after  lorizzo's  arrest. 

I  found  the  Russians  to  be  a  group  that  wanted  to  flex  their  mus- 
cles and  would  not  hesitate  to  resort  to  violence  when  they  felt  it 
necessary  to  do  so.  They  enjoyed  the  relationship  with  both  myself 
and  the  Colombo  family  because  it  gave  them  power  and  recogni- 
tion as  a  group  to  be  reckoned  with. 

I  did  not  find  the  Russian  criminals  to  be  a  very  structured 
group  in  comparison  to  the  Italian  La  Cosa  Nostra.  They  were  very 
clannish,  however,  and  the  most  financially  successful  Russian  was 
looked  up  to  by  his  comrades  as  their  leader  or  boss.  The  boss  was 
given  a  lot  of  courtesy  and  respect  and  in  return  provided  the  mem- 
bers of  his  group  with  opportunities  to  work  for  him  and  make 
money. 

Michael  Markowitz,  David  Bogatin  and  Lev  Persits  were  all  in 
a  position  of  leadership  and  had  about  200  other  Russians  working 
under  them  in  various  capacities.  They  were  also  continuously  as- 
sisting other  Russians  in  immigrating  to  the  United  States. 

After  I  went  to  prison  in  1985,  my  information  was  that 
Markowitz,  Bogatin  and  Persits  did  continue  to  work  with  the 
Colombo  family  in  the  gasoline  business  for  a  short  period  of  time. 

Around  1988,  Markowitz  was  shot  and  killed  in  fi'ont  of  his  home 
in  Brooklyn.  I  do  not  know  who  was  responsible  for  his  death.  How- 
ever, I  am  reasonably  certain  that  the  hit  was  authorized  by  the 
Colombo  family  and  could  possibly  have  been  carried  out  by  other 
Russians. 

An  attempt  was  also  made  on  the  life  of  Lev  Persits.  Although 
he  survived  the  attempt,  he  is  permanently  disabled  and  confined 
to  a  wheelchair  today. 

David  Bogatin  fled  to  Austria,  where  he  had  a  controlling  inter- 
est in  the  bank  that  was  funded  with  gasoline  tax  money  from  our 
operation.  He  was  captured  in  Poland,  extradited  to  the  United 
States  to  face  tax  fraud  charges  and  is  currently  serving  a  Federal 
prison  sentence. 

I  have  provided  the  Subcommittee  with  a  basic  overview  of  my 
personal  experience  with  Russian  immigrants  engaging  in  criminal 
activities  during  the  1980's.  I  hope  this  information  is  helpful,  and 
I  would  be  happy  to  answer  any  questions  the  Subcommittee  might 
have. 

Thank  you. 

Senator  RoTH.  Thank  you,  Mr.  Franzese.  You  stated  that  in  your 
opinion,  these  fraudulent  measures  with  the  fuel  tax  continue. 
Does  it  continue  on  as  large  a  scale  as  in  the  past? 

Mr.  Franzese.  I  do  not  believe  so.  I  believe  that  once  the  law 
was  changed,  the  volume  and  the  methods  decreased.  But  I  am 
told — I  was  recently  released  from  prison  in  1994,  and  I  met  sev- 
eral people  who  had  still  been  dealing  with  the  Russians,  and  I  am 
told  that  especially  in  New  York,  the  gas  tax  scheme  was  continu- 
ing as  late  as  1994. 

Senator  ROTH.  And  on  a  fairly  large  scale? 

Mr.  Franzese.  Yes,  on  a  large  scale,  but  not  quite  as  large  as 
it  was  in  the  1980's. 

Senator  ROTH.  At  the  peak  of  your  gas  tax  business,  how  many 
gas  stations  were  involved? 


40 

Mr.  Franzese.  I  would  say  well  over  600  stations,  and  it  could 
have  been  close  to  1,000  gas  stations  that  we  operated  or  sold  gas 
to. 

Senator  Roth.  And  how  many  of  those  were  brand  name  sta- 
tions? 

Mr.  Franzese.  Approximately  a  third. 

Senator  ROTH.  How  were  you  first  introduced  to  the  Russians? 

Mr.  Franzese.  I  met  the  Russians  through  a  soldier  in  my  orga- 
nization. The  Russians  had  gone  to  him,  asking  if  he  could  help 
them  collect  a  debt.  They  were  owed  $70,000.  This  fellow,  whose 
name  was  Vinnie,  came  to  me  and  asked  my  permission  to  assist 
the  Russians,  and  I  told  him  he  could  do  it.  At  that  point,  they 
asked  to  meet  me  personally,  and  a  meeting  was  set  up. 

Senator  ROTH.  Now,  you  testified  that  you  provided  the  Russians 
with  protection  from  other  organized  crime  families  and  muscle  to 
collect  their  debts.  What  exactly  did  you  do  in  each  of  these  areas? 

Mr.  Franzese.  Well,  as  far  as  collecting  the  debts,  I  just  made 
sure  that  any  gasoline  stations  or  other  wholesalers  that  they  serv- 
iced would  pay  the  money  that  was  due  them.  And  as  far  as  pro- 
tecting them  from  other  organized  crime  groups,  I  put  them  on 
record  with  every  other  family  that  they  were  with  me  and  part  of 
my  operation  and  that  no  one  else  was  to  try  to  muscle  in  on  them 
or  try  to  do  business  with  them. 

Senator  Roth.  If  the  Russians  brought  this  business  to  you,  how 
did  you  come  to  the  decision  that  there  would  be  a  75-25  percent 
split? 

Mr.  Franzese.  I  explained  to  them  that  we  were  taking  most  of 
the  risk,  we  were  securing  the  license,  and  that  I  had  to  take  care 
of  the  rest  of  the  Colombo  family  and,  quite  honestly,  I  knew  that 
to  a  large  degree,  they  controlled  some  of  the  money,  and  there  was 
a  lot  of  stealing  going  on  amongst  each  other.  So  I  just  rounded  it 
off  to  75-25  percent,  and  they  were  satisfied  with  that. 

Senator  ROTH.  Out  of  the  75  percent  you  took,  how  much  did  you 
keep  and  how  much  went  to  the  Colombo  family? 

Mr.  Franzese.  About  one-third  went  to  the  Colombo  family.  The 
other  two-thirds  was  split  among  myself  and  the  various  people 
that  I  had  working  in  the  operation. 

Senator  Roth.  Since  Markowitz  was  such  a  big  money-maker  for 
you  and  the  Colombo  family,  why  was  he  killed? 

Mr.  Franzese.  I  believe  for  two  reasons.  Number  one,  he  was  re- 
luctant to  work  with  the  rest  of  the  Colombo  family  once  I  went 
to  prison.  And  I  also  understand  that  he  might  have  been  cooperat- 
ing with  Federal  authorities. 

Senator  Roth.  Do  you  have  any  insights  as  to  how  Russian  orga- 
nized crime  is  developing  in  this  country?  Do  you  have  any  knowl- 
edge as  to  how  they  are  cooperating  with  more  traditional,  estab- 
lished organized  crime  families? 

Mr.  Franzese.  I  could  only  speak  of  my  own  experience,  that 
they  were  very  willing  to  cooperate  with  our  group.  La  Cosa 
Nostra.  They  were  not  interested  in  trying  to  fight  with  us;  they 
would  rather  share  proceeds.  They  had  no  problem  with  working 
along  with  us.  And  from  my  understanding,  they  are  continuing  to 
operate  in  that  way  today. 

Senator  Roth.  Senator  Cohen? 


41 

Senator  COHEN.  Had  the  Colombo  family  not  thought  of  the  fuel 
tax  scam  previously,  before  the  Russians  arrived? 

Mr.  Franzese.  The  Colombo  family  had  not.  I  actually  intro- 
duced this  to  the  Colombo  family  when  lorizzo  came  to  me  origi- 
nally, and  we  had  developed  this  scheme,  and  to  my  surprise,  I 
found  out  the  Russians  were  also  doing  it  when  I  met  them;  they 
just  did  not  have  the  muscle  to  collect  their  money,  and  they  did 
not  have  the  availability  of  the  licenses  that  were  needed. 

Senator  COHEN.  I  am  just  curious  as  to  why  you  would  want  to 
share  any  part  of  the  market  with  anyone.  In  other  words,  you 
have  an  established  organized  criminal  group;  why  would  you  want 
to  share  on  a  75-25  or  50-50  or  any  percentage  basis?  If  you  have 
an  idea,  and  you  have  the  organization,  and  you  have  the  muscle 
yourself,  why  would  you  want  to  let  another  group  come  in  and 
take  a  portion  of  it? 

Mr.  Franzese.  Well,  the  way  the  transaction  worked,  the  Rus- 
sians had  about  300  stations  themselves  that  they  were  supplying. 
So  by  allowing  them  to  write  off  on  our  license,  we  obtained  pro- 
ceeds from  those  300  stations  that  we  would  not  ordinarily  have 
had. 

Senator  Cohen.  In  other  words,  they  were  already  in  the  busi- 
ness, and  this  was  just  a  pure  business  decision  to  share  the 
wealth  at  that  particular  point. 

Mr.  Franzese.  Yes. 

Senator  COHEN.  But  if  I  were  to  come  up  now  as  a  result  of  lis- 
tening to  your  testimony  and  others,  and  say,  "Hey,  I've  got  a  great 
idea  of  how  to  scam  the  Government,"  would  I  find  resistance  from 
organized  criminal  elements  to  my  entering  the  marketplace? 

Mr.  Franzese.  I  do  not  believe  so.  If  you  brought  profit  to  the 
table,  I  do  not  believe  there  would  be  any  resistance  at  all. 

Senator  Cohen.  If  I  have  an  idea,  and  I  do  not  have  the  muscle, 
they  would  be  willing  to  allow  me  to  enter  the  marketplace? 

Mr.  Franzese.  I  believe  so,  yes. 

Senator  COHEN.  So  there  was  no  fear  on  the  part  of  the  existing 
organized  criminal  groups  that  they  would  have  to  deal  with  the 
violent  element  in  the  Russian  gangs;  was  that  not  a  factor? 

Mr.  Franzese.  There  was  no  fear  at  all  from  La  Cosa  Nostra,  no. 
They  were  not  worried  about  that.  I  found  the  Russians  to  be  actu- 
ally kind  of  submissive  to  us.  Although  I  found  they  would  not 
hesitate  to  be  violent  amongst  each  other,  I  thought  that  they  were 
really  worried  about  us,  and  I  thought  they  were  fearful  of  us  as 
a  group,  and  therefore  they  would  rather  align  with  us  than  fight 
with  us. 

Senator  COHEN.  You  also  indicated  that  the  Russians  have  no 
fear  of  our  laws  as  such;  right? 

Mr.  Franzese.  Yes.  They  indicated  to  me  that  Russian  prisons 
were  hell  and  that  the  prisons  here  in  America  were  like  clubs,  and 
the  laws  in  Russia  were  very  strict.  As  a  matter  of  fact,  I  know 
Bogatin  had  done  some  time,  and  I  think  both  Markowitz  and 
Persits  had  experienced  Russian  prisons.  So  they  had  no  fear  what- 
soever of  the  law  or  the  prison  system  here. 

Senator  Cohen.  And  that  would  continue  to  be  the  case  today, 
then? 


42 

Mr.  Franzese.  I  believe  so.  I  do  not  know  why  it  would  change 
so  dramatically. 

Senator  Cohen.  What  might  be  hard  time  for  you  might  not  be 
hard  time  for  someone  else. 

Mr.  Franzese.  According  to  them,  that  is  correct. 

Senator  Cohen.  Do  you  know  whether  they  are  tied  to  other  or- 
ganized criminal  groups  of  the  Sicilians,  the  Colombians?  Are  they 
engaging  in  narcotics  traffic  in  cooperation  with  other  existing 
groups? 

Mr.  Franzese.  I  do  not  know  that  from  my  own  personal  knowl- 
edge, no. 

Senator  COHEN.  Do  you  know  whether  the  new  Russian  orga- 
nized criminal  elements  coming  into  the  United  States  are  more 
violent  than  the  existing  ones? 

Mr.  Franzese.  I  am  hearing  that  they  are  more  violent,  yes. 

Senator  COHEN.  And  also  more  sophisticated  in  terms  of  their  ca- 
pabilities? 

Mr.  Franzese.  Well,  I  thought  the  group  that  I  was  with  was 
very  sophisticated.  Markowitz  had  several  educational  degrees.  He 
was  an  engineer.  He  had  developed  a  taxi  meter,  a  computerized 
meter,  that  I  think  was  first  introduced  in  New  York.  I  found  them 
to  be  very  intelligent  even  at  that  time. 

Senator  Cohen.  I  was  going  to  bring  this  out  in  the  previous 
panel,  but  my  understanding  is  that  the  FBI  is  looking  for  a  few 
good  men  and  women,  particularly  with  backgrounds  in  math  and 
computer  science,  in  order  to  combat  the  sophistication  of  the  crime 
groups  that  are  coming  in. 

Mr.  Franzese.  Yes. 

Senator  Cohen.  And  I  guess  we  are  going  to  have  to  do  that  for 
the  IRS  and  the  FBI  and  all  the  other  elements  involved,  because 
as  criminal  groups  become  more  sophisticated,  as  they  move  into 
cyberspace,  as  they  are  able  to  engage  in  computer  hacking,  allow- 
ing them  to  access  the  vaults  of  various  banks  here  in  the  United 
States  and  worldwide  and  with  a  stroke  of  a  key  on  a  computer, 
funnel  off  millions  of  dollars  in  a  matter  of  seconds,  we  are  going 
to  need  more  sophisticated  methods  of  combating  these  criminals. 
So  that  is  something  that  I  think  we  also  have  to  focus  on. 

Mr.  Franzese.  Yes,  sir.  One  other  thing  that  I  noticed  is  that 
when  the  Government  changed  the  gasoline  law  and  they  made  the 
responsibility  of  collecting  taxes,  they  shifted  it  from  the  retailer  at 
the  gas  station  level  to  the  wholesaler,  and  they  thought  they  were 
going  to  put  everybody  out  of  business.  But  what  I  found  is  that 
they  advertised  the  fact  that  they  were  going  to  do  that  over  sev- 
eral months — they  made  it  public — and  by  the  time  they  changed 
the  law,  we  had  a  perfected  scheme  that  made  it  even  more  lucra- 
tive than  the  one  we  had  before.  So  I  think  maybe  some  kind  of 
concealment  in  that  regard  might  be  helpful. 

Senator  COHEN.  Do  you  think  we  can  pass  laws  in  a  concealed, 
covert  fashion? 

Mr.  Franzese.  I  do  not  know.  I  do  not  know. 

Senator  Cohen.  I  think  I  have  already  answered  the  question. 

Mr.  Franzese.  Yes. 

Senator  Cohen.  Thank  you,  Mr.  Chairman. 

Senator  ROTH.  Thank  you.  Senator  Cohen. 


43 

That  will  be  all  Mr.  Franzese.  Thank  you. 

Mr.  Franzese.  Thank  you. 

Senator  RoTH.  Our  next  witness  is  Anthony  Casso,  who  is  a 
former  underboss  of  the  Lucchese  organized  crime  family.  Mr. 
Casso  is  currently  in  Federal  custody  and  cooperating  with  the 
Government  while  awaiting  sentencing. 

Given  the  sensitive  nature  of  Mr.  Casso's  position  as  a  cooperat- 
ing witness,  we  have  agreed  to  limit  his  testimony  to  matters  relat- 
ing to  Russian  organized  crime,  and  we  would  appreciate  the  co- 
operation of  all  Subcommittee  members  in  abiding  by  this  under- 
standing. 

Mr.  Casso  was  scheduled  to  testify  openly;  however,  as  a  result 
of  last-minute  concerns  raised  by  the  Department  of  Justice,  Mr. 
Casso  will  testify  from  behind  a  screen.  It  is  my  understanding 
that  members  of  the  media  have  already  been  advised  as  to  those 
locations  in  the  hearing  room  where  cameras  will  and  will  not  be 
permitted  during  the  course  of  the  testimony  in  order  to  maintain 
security. 

Prior  to  the  entrance  of  this  witness,  I  direct  that  all  cameras  be 
turned  to  face  either  to  the  ceiling  or  to  the  window  side  of  the 
hearing  room.  I  will  ask  the  Capitol  Police  whether  all  cameras 
have  been  redirected.  And  I  would  then  ask  the  Capitol  Police  to 
secure  the  hearing  room,  and  when  that  is  done,  the  witness  will 
be  brought  in. 

We  will  proceed  in  just  a  minute. 

Mr.  Casso,  we  swear  all  witnesses  before  the  Subcommittee,  but 
I  would  ask  that  you  remain  seated  while  I  administer  the  oath. 

Mr.  Casso,  please  raise  your  right  hand.  Do  you  swear  or  affirm 
that  the  testimony  you  will  give  before  this  Subcommittee  is  the 
truth,  the  whole  truth,  and  nothing  but  the  truth,  so  help  you, 
God? 

I  do. 

Senator  ROTH.  Mr.  Casso,  are  you  represented  by  counsel  today, 
and  if  so,  would  counsel  please  identify  yourself  and  your  firm  for 
the  record. 

Mr.  Brief.  Matthew  Brief,  B-r-i-e-f,  Brief,  Kesselman,  Knapp  and 
Schulman. 

Senator  RoTH.  Mr.  Casso,  would  you  please  proceed  with  your 
testimony? 

TESTIMONY  OF  ANTHONY  CASSO,i  FORMER  UNDERBOSS, 
LUCCHESE  ORGANIZED  CRIME  FAMILY,  ACCOMPANIED  BY 
MATTHEW  BRIEF,  LAW  FIRM  OF  BRIEF,  KESSELMAN,  KNAPP 
AND  SCHULMAN 

Mr.  Casso.  Good  afternoon,  Mr.  Chairman  and  Members  of  the 
Subcommittee.  My  name  is  Anthony  Casso.  Early  in  my  life,  I  was 
given  the  nickname  of  "Gaspipe." 

I  have  been  in  jail  since  1993,  when  I  was  arrested  after  being 
a  fugitive  for  almost  3  years.  At  that  time,  I  was  the  underboss  of 
the  Lucchese  organized  crime  family.  Ultimately,  I  decided  to  co- 
operate rather  than  go  to  trial. 


^The  prepared  statement  of  Mr.  Casso  appears  on  page  170. 


44 

As  part  of  my  deal  with  the  Government,  I  pleaded  guilty  to  a 
72-count  indictment,  including  murder,  racketeering  and  extortion. 
I  have  not  yet  been  sentenced,  and  no  promises  have  been  made 
to  me  for  my  testimony  here  today. 

As  part  of  my  cooperation  agreement,  I  told  the  Government 
about  my  life  of  crime.  I  gave  a  deposition  for  use  in  an  Israeli 
trial,  but  I  have  not  yet  testified  at  a  trial  in  the  United  States. 
I  will  testify  if  requested  by  the  Government  at  upcoming  orga- 
nized crime  trials. 

I  have  been  involved  with  organized  crime  for  more  than  35 
years,  since  I  was  a  kid  working  on  the  docks  in  Brooklyn,  New 
York.  When  I  was  21,  I  became  associated  with  a  guy  named  Chris 
Furnari  of  the  Lucchese  organized  crime  family.  Everyone  knows 
him  as  "Christy  Tick." 

Before  I  was  arrested  this  time,  I  had  only  been  in  jail  once.  That 
was  in  1962  for  5  days,  when  I  was  convicted  of  running  a  book- 
making  operation  on  the  docks  and  was  fined  $50.  After  that,  I  was 
arrested  several  times  for  different  Federal  and  State  charges  in- 
cluding assault  with  a  gun,  selling  stolen  property,  dealing  heroin, 
burglarizing  a  bank,  and  bribing  State  parole  officers.  In  every 
case,  I  was  either  acquitted,  or  the  charges  were  dropped. 

In  the  early  1970's,  I  met  Vic  Amuso.  Then,  in  1974,  I  became 
a  "made"  member  of  the  Lucchese  family.  Vic  was  "made"  in 
around  1977.  At  that  time,  "Tony  Ducks"  Corallo  was  the  boss  of 
our  family.  But  in  1986,  Tony  Ducks  went  to  jail,  so  he  had  to 
name  a  new  boss.  I  became  a  "capo"  in  1986. 

After  discussions  within  the  family,  Tony  Ducks  made  Vic  Amuso 
the  boss  at  the  end  of  1986.  At  the  end  of  1987,  Vic  told  me  I  was 
the  new  consiglieri.  Then,  in  1989,  Vic  named  me  the  underboss  of 
the  family.  After  Vic  was  arrested  in  July  1991,  I  ran  the  Lucchese 
family  as  underboss  while  I  was  a  fugitive. 

In  my  position  as  a  member  of  the  Lucchese  family,  I  came  to 
know  individuals  associated  with  Russian  organized  crime,  which 
is  the  subject  I  have  been  asked  to  testify  about  today. 

In  the  mid-1980's,  our  family  got  involved  with  Russian  orga- 
nized crime  in  the  gasoline  business  in  Brooklyn.  Italian  and  Rus- 
sian organized  crime  made  large  amounts  of  money  by  working 
scams  to  avoid  paying  taxes  on  gasoline.  The  Russians  owned  hun- 
dreds of  gas  stations  and  controlled  the  supply  and  distribution  of 
gasoline.  We  provided  them  with  protection  they  needed  to  main- 
tain a  cartel.  We  also  helped  them  set  up  corporations  to  work  the 
scam. 

The  main  Russian  guy  working  with  our  family  was  Marat 
Balagula.  Marat  was  one  of  the  early  leaders  of  Russian  organized 
crime  in  Brooklyn.  He  made  millions  off  the  gas  tax  business,  and 
our  family  made  a  lot  of  money  with  him. 

In  around  late  1986,  another  Russian  named  Vladimir,  whose 
last  name  I  did  not  know  at  the  time,  came  up  to  Marat  in  a  Rus- 
sian restaurant  in  Brighton  Beach.  Vladimir  had  recently  arrived 
in  Brighton  Beach  from  Russia.  According  to  the  Russians,  the 
word  on  the  street  was  that  he  was  a  tough  guy  with  his  own  crew. 
Marat  told  me  Vladimir  pulled  a  gun,  put  it  next  to  Marat's  head, 
told  Marat  that  he  was  his  new  partner,  and  demanded  Marat  pay 
him  $600,000,  or  Marat  would  be  dead. 


45 

Marat  reached  out  to  us  and  told  us  what  happened.  We  agreed 
to  meet  him  the  next  day.  When  we  went  to  Marat's  house,  we 
found  out  that  he  was  so  scared  that  he  had  a  heart  attack  but  did 
not  want  to  go  to  the  hospital.  I  remember  seeing  Marat  in  bed, 
hooked  up  to  all  kinds  of  machines,  refusing  his  doctor's  orders  to 
go  to  the  hospital.  Marat's  guy  wanted  us  to  kill  Vladimir. 

Since  Marat  was  with  our  family,  and  especially  since  he  was 
such  a  moneymaker  for  us,  this  was  not  just  a  threat  against 
Marat;  this  was  a  threat  against  the  Lucchese  family  as  well.  We 
knew  what  we  had  to  do. 

Vic  and  I  agreed  that  Vladimir  had  to  be  killed.  We  took  this  sit- 
uation to  Christy  Tick,  who  agreed  that  we  could  have  Vladimir 
killed.  Vic  gave  the  hit  to  Joey  Testa. 

We  asked  Marat  and  one  of  his  guys  to  get  us  some  information 
to  identify  Vladimir.  One  of  Marat's  guys  got  us  his  picture  and  li- 
cense plate  number.  We  had  Marat  call  Vladimir  and  arrange  to 
have  lunch  with  him  at  the  same  Russian  restaurant  in  Brighton 
Beach  where  Marat  was  threatened.  After  leaving  the  restaurant, 
Vladimir  was  shot  and  killed. 

I  heard  about  the  murder  on  the  radio.  Marat  was  very  thankful 
that  we  had  gotten  rid  of  this  problem.  We  could  not  let  somebody 
try  to  put  the  squeeze  on  one  of  our  family's  biggest  moneymakers. 
After  that,  Marat  did  not  have  any  more  problems  from  any  other 
Russians. 

I  found  the  Russian  organized  crime  groups  to  be  very  clever.  We 
knew  the  Russians  were  involved  in  heroin  trafficking  as  well  as 
complicated  scams  involving  forgery,  and  tax  evasion  in  the  oil  and 
gas  business.  The  Russians  were  also  very  willing  to  use  violence 
to  achieve  their  goals. 

I  will  be  happy  to  answer  any  questions  you  have  about  my 
knowledge  of  Russian  organized  crime. 

Senator  Roth.  Mr.  Casso,  at  this  time,  do  you  know  the  man  you 
identified  in  your  statement  as  "Vladimir"  to  be  Vladimir 
Reznikov? 

Mr.  Casso.  Yes,  I  do. 

Senator  RoTH.  And  in  addition  to  the  murder  you  just  described 
in  previous  testimony,  we  have  also  been  told  of  another  murder 
in  Brooklyn  of  a  Russian  organized  crime  figure  who  worked  with 
La  Cosa  Nostra  in  the  gas  tax  scam,  that  is,  the  killing  of  Michael 
Markowitz  who  worked  with  the  Colombo  family.  What  were  the 
facts  surrounding  this  murder,  and  describe  any  discussions  you 
had  with  anyone  in  the  Colombo  family  regarding  the  Markowitz 
murder? 

Mr.  Casso.  I  had  discussions  with  the  Colombo  boss,  Vic  Orena 
and  a  Colombo  soldier,  Frankie  "The  Bug"  Sciortino. 

Senator  ROTH.  Would  you  please  speak  into  the  microphone? 

Mr.  Casso.  And  I  knew  the  Markowitz  murder  was  going  to  take 
place  sooner  or  later,  that  they  were  working  on  planning  on  killing 
Markowitz. 

Senator  Roth.  Now,  you  testified  that  the  Lucchese  family  pro- 
vided protection  to  Russian  organized  crime  in  the  gas  tax  scheme. 
Specifically,  what  protection  service  did  your  family  provide  for  the 
Russians? 


46 

Mr.  Casso.  We  provided  that  no  one  would  go  into  their  territory 
and  sell  gas,  and  made  sure  people  paid  them  the  moneys  they  had 
coming  to  them.  And  we  would  make  it  known  that  they  belonged 
with  us,  our  group,  and  no  one  would  bother  them  at  all. 

Senator  Roth.  Now,  you  testified  that  Marat  Balagula  was  a 
leading  figure  among  Russian  organized  crime  in  Brooklyn.  Why 
would  he  contact  you  after  he  was  threatened  by  another  Russian? 

Mr.  Casso.  Because  Marat  was  with  our  family,  so  the  proper 
thing  to  do  was  just  what  he  did,  to  contact  us  to  handle  it. 

Senator  ROTH.  Where  is  Balagula  today? 

Mr.  Casso.  He  is  in  Federal  prison,  I  believe. 

Senator  RoTH.  Did  Balagula  actually  ask  you  to  have  Reznikov 
killed,  or  simply  to  make  him  back  off? 

Mr.  Casso.  No;  he  wanted  him  killed.  He  was  deathly  afraid  of 
him. 

Senator  ROTH.  Did  you  receive  any  payment  for  killing  Reznikov? 

Mr.  Casso.  None  whatsoever. 

Senator  Roth.  Was  Joey  Testa  given  any  payment  for  killing 
Reznikov? 

Mr.  Casso.  None. 

Senator  Roth.  Now,  you  testified  about  pleading  guilty  to  a  72- 
count  indictment,  including  murder,  racketeering  and  extortion. 
How  many  murders? 

[Pause.] 

Mr.  Casso.  I  believe  16. 

Senator  ROTH.  I  am  sorry,  I  could  not  hear  you. 

Mr.  Casso.  I  beheve  16. 

Senator  Roth.  Was  Joey  Testa  every  charged  with  killing 
Reznikov,  and  where  is  he  today? 

Mr.  Casso.  He  was  never  charged  with  that  murder,  and  he  is 
at  a  Federal  prison  also. 

Senator  Roth.  Now,  you  stated  that  you  are  a  "made"  member 
of  the  Lucchese  family.  Would  you  please  explain  what  that  means 
and  describe  the  initiation  ceremony  by  which  you  became  a 
"made"  member? 

Mr.  Casso.  To  become  a  "made"  member,  you  have  to  be  spon- 
sored by  a  captain  of  the  family,  who  would  bring  you  to  the  boss 
of  the  family  and  sponsor  you  to  become  a  "made"  member.  They 
have  a  ceremony  with  the  boss,  the  consiglieri,  and  the  underbosses 
present  at  that  time,  and  the  captain  who  brings  you  in. 

They  prick  your  trigger  finger  and  make  it  bleed,  and  then  they 
put  it  on  a  little  piece  of  paper;  they  set  it  on  fire,  and  you  burn 
it  in  your  hand,  and  you  repeat  after  them  that  you  will  never  be- 
tray La  Cosa  Nostra,  or  you  will  burn  like  the  paper  is  burning  in 
your  hand.  And  your  life  does  not  belong  to  you  anymore;  your  life 
belongs  to  them. 

Senator  Roth.  Now,  we  know  that  the  Luccheses  were  not  the 
only  organized  crime  family  involved  with  the  Russians  in  the  gas 
tax  business.  What  role  did  you  play  in  getting  other  La  Cosa 
Nostra  families  involved  in  this  gas  tax  scam? 

Mr.  Casso.  Well,  what  we  did  was — the  Colombo  boss  came  to 
see  me,  and  we  put  it  together — the  Russians  wanted  to  put  it  to- 
gether so  there  was  no  more  problem,  the  Russians  would  get  paid, 


47 

and  everyone  would  not  steal  each  other's  stops,  and  put  every- 
thing above  board. 

So  the  Genovese  family  had  a  branch  in  the  gasoline  business 
also,  with  their  own  group  of  Russians.  What  I  did  was  I  reached 
out  for  the  Genovese  family;  I  met  with  them,  I  met  with  their 
underboss.  I  told  them  we  wanted  to  have  a  meeting  with  the 
Colombo  family,  the  Lucchese  family  and  the  Genovese  family,  and 
that  the  people  we  have  running  the  gasoline  business  for  us  who 
go  up  front  and  handle  this  every  day  with  the  Russians  have  a 
meeting,  and  let  us  all  make  this  one;  we  will  put  it  together,  and 
everyone  earns  an  equal  share.  And  this  is  what  we  did. 

We  had  this  meeting.  They  agreed.  We  put  it  together.  Being 
that  everyone  agreed,  we  turned  around,  and  we  told  the  Russians 
that  they  would  have  to  pay  a  tax  of  a  penny  a  gallon  to  us,  to  our 
three  families,  which  totalled  maybe  $500,000  a  month.  And  they 
agreed  upon  this;  they  were  very  happy  because  they  could  run 
their  business  without  having  a  problem  from  anyone. 

So  now  we  had  three  families  involved.  We  had  the  Genovese 
family,  the  Luccheses,  and  the  Colombo  family.  And  we  ran  like 
that  until  about  1988.  In  1988,  the  Gambino  family  wanted  to  get 
involved.  They  also  had  a  Russian  group  that  they  were  working 
with,  but  in  a  little  smaller  way,  and  that  group  was  interfering 
with  what  we  put  together. 

So  we  took  it  upon  ourselves — we  had  another  meeting  about  the 
Gambino  family  and  if  we  were  going  to  invite  them  into  the  cartel 
that  we  put  together,  which  we  did;  we  made  it  a  4-way  split.  And 
we  had  four  groups — the  Gambinos  had  a  Russian  group,  the 
Luccheses  had  their  own  Russian  group,  the  Colombos  had 
Markowitz  and  his  Russian  group,  and  the  Genovese  family  had 
their  own.  We  just  combined  it  like  that,  and  it  was  running 
smooth. 

Senator  ROTH.  Do  you  know  if  these  kinds  of  agreements  are  still 
in  effect? 

Mr.  Casso.  In  the  present,  as  far  as  I  know,  yes. 

Senator  RoTH.  As  far  as  you  know,  yes? 

Mr.  Casso.  Yes. 

Senator  Roth.  Are  you  aware  of  any  other  murders  committed 
by  the  La  Cosa  Nostra  families  on  behalf  of  Russian  organized 
crime  in  connection  with  gas  tax  schemes? 

Mr.  Casso.  I  know  there  were  a  couple  of  murders  with  Russians 
with  the  Gambino  group,  but  I  do  not  really  know  their  names.  But 
I  know  a  couple  of  murders  took  place  with  them,  with  their  group. 

Senator  Roth.  How  would  you  characterize  the  Russians  as  busi- 
ness partners? 

Mr.  Casso.  They  are  good  businessmen.  They  are  good  business- 
men, and  as  far  as  money-wise,  whatever  you  have  coming  to  you, 
they  always  made  much  more  money  than  they  gave  organized 
crime,  than  we  got.  But  we  always  knew  that. 

Senator  Roth.  Senator  Cohen? 

Senator  Cohen.  Thank  you,  Mr.  Chairman. 

Mr.  Casso,  how  did  you  get  the  name  "Gaspipe"? 

Mr.  Casso.  They  have  been  calling  me  that  since  a  very  early 
age,  when  I  was  a  teenager.  It  was  like  a  family  name,  and  being 
that  I  was  the  youngest  out  of  3  children,  it  stuck  with  me. 


48 
Senator  COHEN.  No  association  with  your  activities,  the  nick- 


name? 

Mr.  Casso.  None  whatsoever. 

Senator  COHEN.  You  mentioned  going  to  the  hierarchy  of  author- 
ity when  Senator  Roth  asked  you  why  Marat  came  to  you  as  such. 
You  said  he  was  just  simply  proceeding  on  a  Une  of  authority,  basi- 
cally, that  it  was  the  proper  thing  to  do.  So  you  had  your  own  orga- 
nizational structure,  since  you  were  the  enforcers,  basically,  or  the 
protectors  of  Marat,  I  assume. 

Mr.  Casso.  Yes,  right. 

Senator  Cohen.  OK.  Do  the  Russian  criminal  gangs  have  the 
same  sort  of  hierarchical  structure  as  any  one  of  the  Italian  fami- 
lies as  such — the  Gambinos,  the  Colombos,  the  Luccheses?  Do  they 
have  capos,  consiglieris,  underbosses,  boss — do  they  have  anything 
like  that? 

Mr.  Casso.  Not  really. 

Senator  COHEN.  So  they  are  not  structured? 

Mr.  Casso.  Not  in  this  country. 

Senator  COHEN.  Not  in  this  country. 

Mr.  Casso.  No.  They  have  gangs,  or  their  own  crews,  the  Rus- 
sians, and  mostly  they  are  violent  among  themselves.  This  is  why 
we  handled  it.  We  would  never  want  Marat  to  go  and  get  someone 
else,  hurt  someone  else.  We  would  rather  him  come,  because  maybe 
there  is  no  need  to  hurt  someone  else.  Maybe  this  is  a  situation 
where  you  can  talk  to  someone  and  resolve  the  problem.  But  the 
Russians  are  not  that  way;  they  are  a  little  hot-headed,  and  they 
are  a  little  violent  sometimes. 

Senator  Cohen.  You  indicated  in  your  statement  that  they  are 
not  afraid  to  use  violence.  Do  you  mean  they  are  not  afraid  to  use 
violence  against  one  another? 

Mr.  Casso.  Right. 

Senator  Cohen.  But  they  would  not  use  violence  against  the 
Lucchese  family  members? 

Mr.  Casso.  No. 

Senator  COHEN.  Why  do  you  think  they  had  to  come  to  you  to 
get  protection — they  do  not  have  enough  muscle  as  such  of  their 
own  that  they  would  simply  say,  "We  don't  need  to  pay  you  a 
penny  a  gallon  for  our  protection"? 

Mr.  Casso.  It  is  not  only  protection;  it  is  putting  it  together  be- 
cause, like  Marat,  he  owned  a  couple  of  hundred  gas  stations.  So 
when  we  put  the  cartel  together,  now  no  one  else  was  going  to  go 
into  his  stations  to  sell  gas  a  little  cheaper,  just  to  sell  the  gas,  and 
they  start  fighting  amongst  themselves  again.  So  we  held  peace, 
and,  you  know,  protection  goes  more  than  one  way. 

Senator  Cohen.  And  you  indicated,  finally,  that  the  Gambino 
family  came  in  toward  the  tail-end  of  this  arrangement  because 
they  had  a  Russian  connection  as  well.  If  another  family  comes 
along  with  a  Russian  connection,  will  they  keep  expanding  the 
business? 

Mr.  Casso.  No.  To  be  honest  with  you,  we  just  barely  let  the 
Gambino  family  in. 

Senator  CoHEN.  OK.  That  is  all  I  have,  Mr.  Chairman. 

Senator  Roth.  Thank  you,  Senator  Cohen. 

That  is  all  that  we  require  of  you,  Mr.  Casso. 


49 

I  would  ask  that  all  spectators  remain  seated  until  the  witness 
leaves  the  hearing  room,  and  I  would  now  direct  the  Capitol  Police 
and  the  Marshals  to  accompany  Mr.  Casso  from  the  hearing  room. 

Our  next  witness  is  a  Russian  criminal  currently  incarcerated  in 
the  United  States.  Again  because  of  security  concerns,  the  witness 
will  be  testifying  anonymously  from  behind  a  screen  to  protect  his 
identity. 

As  I  said  before,  it  is  my  understanding  that  members  of  the 
media  have  already  been  advised  as  to  those  locations  in  the  hear- 
ing room  where  cameras  will  and  will  not  be  permitted  during  the 
course  of  this  testimony,  in  order  to  maintain  security.  Prior  to  the 
entrance  of  this  witness,  I  direct  that  all  cameras  be  turned  to  face 
either  to  the  rear  or  to  the  window  side  of  the  hearing  room.  I 
would  ask  the  Capitol  Police  whether  all  cameras  have  been  redi- 
rected and  whether  the  hearing  room  is  secure  so  that  the  witness 
may  be  brought  in. 

Please  bring  him  in. 

I  would  say  to  the  witness  that  we  swear  all  witnesses  who  ap- 
pear before  the  Subcommittee.  I  would  ask  that  you  remain  seated 
while  I  administer  the  oath.  Please  raise  your  right  hand. 

Do  you  swear  or  affirm  that  the  testimony  you  will  give  before 
this  Subcommittee  is  the  truth,  the  whole  truth,  and  nothing  but 
the  truth,  so  help  you,  God? 

Anonymous  Russian  Criminal.  Yes,  I  do. 

Senator  Roth.  Please  proceed  with  your  testimony,  and  pull  the 
microphone  closer  and  speak  up  a  little  louder. 

TESTIMONY  OF  AN  ANONYMOUS  RUSSIAN  CRIMINAL  i 

Anonymous  Russian  Criminal.  Chairman  Roth,  Members  of  the 
Subcommittee,  good  afternoon. 

I  have  been  asked  to  testify  today  about  Russian  organized  crime 
in  the  United  States,  a  problem  which  exists  in  several  cities  and 
is  likely  to  grow. 

Let  me  explain  the  two  reasons  why  I  am  able  to  speak  on  this 
subject.  First,'  I  grew  up  in  Russia  with  people  who  are  now  leaders 
of  criminal  groups  worldwide,  including  here  in  the  United  States. 
My  father  was  a  high-ranking  officer  in  the  Soviet  military,  and  so 
as  a  boy,  I  attended  the  best  schools  and  socialized  with  the  Com- 
munity Party  elite.  My  classmates  included  many  future  politicians 
and  criminal  leaders. 

Second,  since  1992,  I  have  lived  in  the  United  States  and  know 
many  of  the  Russian  criminals  who  have  settled  here.  Some  of 
these  men,  such  as  Leonid  Zuza  and  Vyacheslav  Kirillovich 
Ivankov,  or  'Taponchik,"  might  be  familiar  to  you.  They  are  to  me. 
What  you  have  to  understand  is  that  the  well-to-do  Russian  com- 
munity in  this  country  is  rather  small  and  that  the  successful  Rus- 
sian criminals  are  part  of  it. 

Through  my  business  and  social  contacts,  I  was  a  part  of  this 
community,  but  I  have  been  in  prison  for  the  past  year.  I  am  serv- 
ing a  sentence  for  the  possession  of  a  firearm,  which  violated  the 
terms   of  my  probation   agreement.   I    am   testifying  behind   this 


^The  prepared  statement  of  the  Anonymous  Russian  Criminal  appears  on  page  172. 


50 

screen  today  because  I  believe  that  if  my  identity  were  known,  I 
or  my  family  might  be  killed. 

To  understand  Russian  organized  crime  in  this  country,  you 
must  first  appreciate  the  situation  in  Russia.  For  the  2  years  prior 
to  my  arrival  in  the  United  States,  I  set  up  and  ran  the  Moscow 
branch  of  an  American  corporation  specializing  in  investments  and 
international  trade.  We  had  a  beautiful  office  3  minutes  from  Red 
Square. 

Now,  there  are  two  things  you  must  do  to  operate  a  business  suc- 
cessfully in  Moscow.  First,  you  must  pay  the  right  government  offi- 
cials under  the  table.  Because  I  had  known  officials  in  Moscow 
since  I  was  a  child,  figuring  out  whom  to  pay  was  simple.  To  set 
up  our  office  so  close  to  Red  Square,  I  had  to  pay  money  to  the 
chief  of  government  property  in  Moscow.  Later,  when  we  wanted 
to  open  a  supermarket  in  Moscow,  I  paid  cash  to  the  mayor  of  Mos- 
cow, Yuri  Luzhkov. 

The  second  thing  you  must  do  to  run  a  successful  business  is 
purchase  a  "krisha,"  literally,  "roof,"  in  Russian,  which  has  come  to 
mean  protection.  The  more  important  you  are,  the  higher  the  roof 
must  be.  In  Moscow,  organized  crime  provides  the  roof. 

Back  in  1990,  I  could  pay  one  organized  crime  group,  say,  10  to 
20  percent  of  our  profits,  and  it  would  make  sure  that  I  did  not 
have  trouble  with  any  other  groups. 

There  was  crime,  but  at  least  it  was  orderly.  Leaders  of  the 
major  organized  crime  groups  in  Moscow  would  meet  regularly  to 
divide  up  opportunities.  But  as  time  went  on,  things  got  out  of  con- 
trol. Fighting  broke  out  among  the  organized  crime  groups  in  Mos- 
cow, and  several  of  the  leaders  were  assassinated.  Otari 
Kvantrishvili,  at  that  time  the  most  powerful  organized  crime  fig- 
ure in  Moscow  and  a  friend  of  mine,  was  the  first  to  be  killed.  Sev- 
eral others  followed.  Most  of  these  men  were  "vory  v  zakone,"  a 
title  reserved  for  powerful  Russian  godfathers. 

As  I  said,  things  got  out  of  control.  I  did  not  know  which  roofs 
to  pay  and  which  were  safe  to  ignore.  Men  were  showing  up  regu- 
larly and  demanding  protection  money.  I  came  to  the  United  States 
to  escape  this  turmoil,  and  I  can  tell  you  that  many  criminals  have 
as  well.  Some  are  thugs  who  worked  as  enforcers  or  muscle  in  m 
groups  based  in  Russia.  These  men  are  responsible  for  much  of  the 
violence  that  has  taken  place  in  Brighton  Beach  and  other  commu- 
nities where  Russians  are  concentrated  in  this  country. 

These  men  are  also  disorganized  and  looking  for  a  leader  to  de- 
vise a  profitable  criminal  venture;  someone  like  Ivankov.  These  are 
dangerous  men,  but  would  be  far  more  so  behind  a  clever  leader. 

There  is  a  difference  between  the  Russian  criminal  who  immi- 
grates to  the  United  States  today  and  the  one  who  came  in  the 
1970's  and  1980's.  Fifteen  years  ago,  Russian  immigrant  criminals 
were  on  the  whole  smarter  than  today's  lot.  The  schemes  they  exe- 
cuted— Balagula's  fuel  tax  evasion,  the  medical  insurance  fraud  of 
the  Smushkevich  brothers — made  them  millionaires.  As  I  said  be- 
fore, most  of  the  current  wave  of  Russian  ms  is  more  prone  to  vio- 
lence, but  less  resourceful  than  their  predecessors.  Whether  or  not 
they  left  Russia  with  money,  they  will  run  out,  and  they  will  be 
looking  for  ways  to  make  more. 


51 

Russian  organized  crime  in  this  country  includes  criminals  from 
both  immigrant  waves.  They  are  involved  in  a  number  of  illegal  ac- 
tivities, many  of  which  I  understand  you  have  heard  about  earlier 
today.  These  range  from  money  laundering  to  extortion  to  car  theft 
to  drug  smuggling  to  insurance  and  gas  tax  fraud  to  murder.  Some 
of  these  crimes,  I  know  about  specifically. 

For  example,  I  know  of  Russian  criminals  in  this  country  who 
ship  guns  and  cocaine  back  to  Russia.  These  men  have  beautiful 
offices  in  Rockefeller  Center  and  Beverly  Hills  and  look  like  legiti- 
mate businessmen.  They  run  import-export  businesses  funded  by 
the  mafia  over  in  Moscow.  Much  of  what  they  trade  in  is  legal,  but 
much  is  also  illegal. 

For  instance,  they  purchase  cocaine  in  the  United  States  for  $20 
to  $30  a  gram  and  sell  it  in  Moscow  for  $100  to  $150.  In  Moscow, 
cocaine  is  a  habit  of  the  very  rich,  which  means  only  three  types 
of  people  can  afford  it — newly-rich  businessmen  and  politicians, 
prostitutes,  and  criminals. 

I  know  of  murders  as  well.  I  knew  Oleg  Koratayev,  the  famous 
Russian  boxer  who  was  shot  and  killed  in  Brighton  Beach  outside 
the  Arbat  Restaurant.  I  know  also  that  in  the  summer  of  1994, 
Leonid  Zuza  ordered  the  murder  of  another  ex-boxer  named 
"Dmitry"  because  he  refused  to  pay  Zuza  $17,000  he  owed  him.  The 
killer,  a  Russian  named  "Vladimir"  who  worked  for  Zuza  shot 
Dmitry  on  a  patio  outside  a  cafe  on  Melrose  Avenue  in  Los  Angeles. 

I  also  know  about  extortion,  which  Russian  criminals  practice  all 
over  the  world,  mainly  on  fellow  Russians.  I  myself  was  approached 
by  a  group  of  Russian  criminals.  They  showed  me  pictures  of  my 
family.  They  did  not  have  to  tell  me  why.  What  they  meant  was 
that  if  I  did  not  pay  them  money,  my  family  would  be  harmed  or 
killed.  They  demanded  tens  of  thousands  of  dollars.  The  leader  of 
the  group  came  to  my  house  one  night  to  collect  this  money  from 
me,  but  I  had  a  shotgun  in  my  house,  and  he  chose  to  leave. 

Professional  hockey  players  from  the  former  Soviet  Union  are 
also  victims  of  extortion.  And  the  extortion  does  not  just  happen  in 
Moscow  or  Kiev;  it  happens  here.  Alexander  Mogilny,  who  plays  for 
the  Vancouver  Canucks,  was  threatened  by  Sergei  Fomitchev,  a 
man  I  know.  Fomitchev  had  helped  Mogilny  come  to  this  country. 
A  couple  of  years  ago,  Fomitchev  came  to  Mogilny,  threatened  him 
and  demanded  money.  Mogilny  was  scared  and  went  to  the  police, 
who  caught  Fomitchev  before  anything  happened.  Fomitchev  has 
ties  to  Russian  organized  crime  groups. 

Often,  when  a  Russian  criminal  demands  money,  the  threat  is 
not  explicit,  but  it  is  clearly  understood.  Alexei  Zhitnick,  a 
defenseman  for  the  Buffalo  Sabres,  used  to  play  for  the  Los  Ange- 
les Kings.  He  showed  up  at  a  Russian  club  in  Los  Angeles  one 
night  with  a  new  car,  expensive  clothes  and  beautiful  women.  He 
was  young  and  naive. 

A  man  named  Sasha,  whom  I  know  is  connected  with  a  Russian 
criminal  group,  approached  Alexei  and  demanded  money  from  him. 
Sasha  was  sending  Alexei  a  warning,  to  make  sure  he  thought 
about  his  future  in  Los  Angeles.  Alexei  did  not  go  to  the  police.  In- 
stead, he  went  to  a  more  powerful  criminal  group  to  take  care  of 
the  problem  for  him,  which  I  understand  it  did. 


52 

I  also  know  Vladimir  Malakhov,  who  plays  for  the  Montreal 
Canadiens,  but  used  to  be  with  the  New  York  Islanders.  He  was 
approached  in  the  National  Restaurant  in  Brighton  Beach  by  a 
man  who  worked  for  Ivankov.  The  man  demanded  money  from 
Malakhov.  He  did  not  have  to  threaten  him  explicitly;  the  message 
was  clearly  understood.  Malakhov  spent  the  next  months  in  fear, 
looking  over  his  shoulder  to  see  if  he  was  being  followed,  avoiding 
restaurants  and  clubs  where  Russian  criminals  hang  out.  Fortu- 
nately, the  problem  went  away  when  Malakhov  was  traded  to  Mon- 
treal. 

These  are  just  a  few  stories  to  illustrate  the  illegal  activities  of 
Russian  organized  crime  in  the  United  States.  What  we  have  here 
cannot  compare  to  the  criminal  activity  and  structure  in  Russia. 
But  what  we  have  here  is  a  problem  that  is  growing.  Just  last 
week,  I  heard  that  another  "vory  v  zakone,"  or  Russian  godfather, 
recently  arrived  in  the  United  States.  As  I  said,  when  leaders  ar- 
rive, the  problems  will  multiply. 

I  am  happy  to  answer  your  questions. 

Senator  Roth.  You  stated  that  there  are  companies  in  the  Unit- 
ed States  exporting  weapons  and  drugs  to  the  former  Soviet  Union. 
What  kind  of  weapons  are  being  shipped,  and  who  is  buying  them? 

Anonymous  Russian  Criminal.  The  most  recent  from  the  Unit- 
ed States  to  Russian  are  shotguns  and  handguns,  a  lot  of  equip- 
ment like  bulletproof  vests  and  walkie-talkie  radios. 

Senator  ROTH.  And  who  is  buying  them? 

Anonymous  Russian  Criminal.  These  weapons  are  bought  by 
criminal  groups  and  new  businessmen. 

Senator  RoTH.  Now,  you  testified  about  the  money  paid  to  gov- 
ernment officials  before  you  could  open  a  business  in  Moscow. 
Would  an  American  businessman  who  wanted  to  set  up  an  office 
in  Moscow  also  have  to  bribe  the  appropriate  official? 

Anonymous  Russian  Criminal.  Yes;  usually,  it  is  more  through 
his  business  connections  and  his  business  partners. 

Senator  ROTH.  You  testified  about  the  extortion  in  this  country 
of  hockey  players  from  the  former  Soviet  Union.  There  have  been 
reports  that  players  or  their  families  have  also  been  threatened 
when  they  return  home  to  the  former  Soviet  Union  during  the  off- 
season. Is  that  correct? 

Anonymous  Russian  Criminal.  Yes,  sir. 

Senator  ROTH.  And  in  the  case  of  the  professional  hockey  player, 
Alexei  Zhitnick,  why  didn't  he  go  to  the  police  after  he  was  threat- 
ened? 

Anonymous  Russian  Criminal.  Because  he  does  not  trust  pohce; 
nobody  trusts  police  in  Russia.  He  would  just  go  to  a  powerful 
criminal  group  to  protect  him. 

Senator  RoTH.  No  trust  in  the  police  because  of  his  past? 

Anonymous  Russian  Criminal.  Yes. 

Senator  RoTH.  You  testified  that  many  of  the  criminals  who  have 
arrived  not  long  ago  in  the  United  States  are  more  violent  than  the 
older  generation  of  criminals  from  the  former  Soviet  Union.  What 
has  caused  this  change? 

Anonymous  Russian  Criminal.  Because  the  new  criminals  who 
are  arriving  in  the  United  States  are  less  educated,  more  violent 
and  disorganized,  and  they  are  ready  for  any  job  to  make  money. 


53 

Senator  Roth.  You  also  stated  that  you  heard  of  a  Russian  god- 
father who  recently  arrived  in  the  United  States.  Who  is  the  person 
you  are  referring  to? 

Anonymous  Russian  Criminal.  His  name  is  Vladimir,  nick- 
named "Rezni";  he  is  a  godfather  and  friend  of  Ivankov. 

Senator  ROTH.  We  have  heard  testimony  that  Ivankov  is  one  of 
the  most  powerful  Russian  organized  crime  figures  to  come  to  the 
United  States.  Why  did  he  come  to  this  country? 

Anonymous  Russian  Criminal.  To  my  understanding,  I  think 
there  are  two  reasons.  The  first  is  to  try  to  escape  from  Russian 
law  enforcement,  and  the  second  is  because  he  does  not  want  to  be 
killed,  like  a  lot  of  his  friends. 

Senator  ROTH.  In  your  testimony,  you  observe  that  fighting 
among  organized  crime  groups  in  Russia  is  causing  criminals  to 
come  to  the  United  States.  What  is  causing  this  turmoil? 

Anonymous  Russian  Criminal.  They  are  fighting  for  power  and 
for  territory. 

Senator  ROTH.  Power  and  territory? 

Anonymous  Russian  Criminal.  Yes,  sir. 

Senator  ROTH.  Do  Russian  criminals  located  in  different  U.S. 
cities  communicate  with  each  other,  and  is  there  communication 
between  criminals  in  Russia  and  those  in  the  United  States? 

Anonymous  Russian  Criminal.  Yes.  Several  groups  in  New 
York  and  Seattle  will  fly  and  meet  each  other  to  look  for  business 
opportunities.  I  know  that  Ivankov  flew  several  times  from  New 
York  to  Los  Angeles  and  back. 

Senator  ROTH.  How  are  Russian  criminals  able  to  get  into  the 
United  States? 

Anonymous  Russian  Criminal.  It  is  very  simple.  They  probably 
can  buy  phony  passports  for  $200  or  $300  and  get  visas  at  the  U.S. 
Embassy,  probably,  in  the  commercial  section  of  the  U.S.  Embassy, 
and  come  to  the  United  States. 

Senator  RoTH.  Those  are  all  the  questions  I  have.  Prior  to  your 
exit,  again  I  want  to  direct  that  all  cameras  be  turned  to  face  ei- 
ther to  the  rear  or  the  window  side  of  the  hearing  room.  I  will  ask 
the  Capitol  Police  whether  all  cameras  have  been  redirected. 

I  will  now  ask  the  Capitol  Police  and  the  Marshals  to  accompany 
the  witness  from  the  hearing  room. 

Senator  ROTH.  Our  final  witnesses  are  a  panel  of  local  law  en- 
forcement officers  who  specialize  in  investigating  Russian  orga- 
nized crime  cases  in  the  United  States.  One  of  these  witnesses  is 
an  undercover  officer  who  will  be  testif3ring  anonymously  from  be- 
hind a  screen  and  with  the  benefit  of  voice  distortion  to  protect  his 
identity. 

Again,  it  is  my  understanding  that  members  have  been  advised 
as  to  the  locations  in  the  hearing  room  where  cameras  will  and  will 
not  be  permitted  during  the  course  of  this  testimony  in  order  to 
maintain  security.  So  at  this  time,  I  direct  that  all  cameras  be 
turned  to  face  either  to  the  rear  or  to  the  window  side  of  the  hear- 
ing room  and  ask  the  Capitol  Police  whether  all  cameras  have  been 
so  directed. 

The  hearing  room  is  secure,  and  the  witness  may  be  brought  in. 


54 

The  other  witnesses  on  this  panel  are  Detective  Dan  Mackey  and 
Ralph  Cefarello  of  the  New  York  City  Police  Department,  and  De- 
tective William  Pollard  of  the  Los  Angeles  Police  Department. 

Gentlemen,  it  is  a  pleasure  to  welcome  you.  As  you  know,  we 
swear  in  all  witnesses.  Again,  I  would  ask  the  witness  behind  the 
screen  not  to  stand  for  the  swearing  in;  the  others,  I  would  ask  to 
please  stand  and  raise  your  right  hand. 

Do  you  swear  or  affirm  that  the  testimony  you  will  give  to  the 
Subcommittee  today  is  the  truth,  the  whole  truth,  and  nothing  but 
the  truth,  so  help  you,  God? 

Mr.  Cefarello.  I  do. 

Mr.  Mackey.  I  do. 

Mr.  Pollard.  I  do. 

Anonymous  Witness.  I  do. 

Senator  ROTH.  Thank  you,  gentlemen.  Please  be  seated 

We  will  begin  our  testimony  with  Detective  Mackey.  Again,  I  will 
ask  you  to  summarize;  your  full  statement,  of  course,  will  be  in- 
cluded in  the  record  as  if  read. 

TESTIMONY  OF  DANIEL  MACKEY  AND  RALPH  CEFARELLO.i 
DETECTIVES,  NEW  YORK  CITY  POLICE  DEPARTMENT 

Mr.  Mackey.  Good  afternoon.  Chairman  Roth,  Senator 
Lieberman  and  Members  of  the  Permanent  Subcommittee  on  In- 
vestigations. My  name  is  Detective  Daniel  Mackey  of  the  New  York 
City  Police  Department.  On  behalf  of  myself  and  my  colleague,  De- 
tective Ralph  Cefarello,  thank  you  for  this  opportunity  to  testify 
about  Russian/Eurasian  criminals  operating  in  New  York  City  and 
what  is  being  done  to  stop  them. 

Previous  speakers  have  given  you  international  and  national  per- 
spectives. Our  view  of  this  most  serious  crime  problem  is  that  of 
working  detectives,  catching  cases  involving  suspects  and  quite 
often  victims  who  were  born  in  the  former  Soviet  Union. 

I  work  in  a  precinct  detective  squad  that  covers  Brighton  Beach, 
Brooklyn.  Since  the  late  1970's,  Brighton  Beach  has  become  home 
to  an  ever-growing  number  of  Russian-speaking  immigrants  from  a 
variety  of  former  Soviet  republics,  including  Georgia,  Azerbaijan 
and  Chechnya.  The  great  majority  are  hardworking,  law-abiding 
citizens  who  have  revitalized  a  neighborhood  that  has  come  to  be 
known  as  "Little  Odessa."  Brighton  Beach  Avenue  is  lined  with 
thriving  markets,  restaurants,  nightclubs,  clothing  and  video  stores 
that  all  cater  to  Russian-speaking  customers.  It  is  possible  to  go 
about  your  daily  business  in  Brighton  Beach  without  uttering  or 
reading  one  word  of  English. 

Unfortunately,  Brighton  Beach  is  also  a  hub  for  Russian-born 
criminals  with  a  well-deserved  reputation  for  extreme  violence. 
Their  criminal  activities  include  vicious  murders  and  assaults,  ex- 
tortion of  Russian-owned  businesses,  prostitution,  illegal  gambling, 
and  a  vast  collection  of  frauds  and  schemes  that  ravage  the  econ- 
omy, causing  government,  businesses  and  consumers  millions  of 
dollars. 

We  have  encountered  staged  motor  vehicle  accidents  in  which  all 
participants    claim    back    and    neck   injuries,    then    file    insurance 


'The  prepared  statement  of  Mr.  Mackey  and  Mr.  Cefarello  appears  on  page  179. 


55 

claims  for  medical  services  provided  by  Russian-operated  medical 
groups  also  believed  to  be  in  on  the  scam.  Additionally,  we  have, 
in  joint  operations  with  the  United  States  Secret  Service,  disman- 
tled sizeable  cellular  phone-cloning  networks  run  by  Russian/Eur- 
asian nationals. 

While  we  have  had  some  success,  it  is  often  difficult,  and  frankly, 
quite  frustrating  to  investigate  these  illegal  activities — for  the 
same  reasons  it  has  always  been  difficult  and  frustrating  to  inves- 
tigate crimes  committed  within  a  closeknit  immigrant  community. 
To  a  large  extent,  the  criminals  count  on  language  as  a  barrier  as 
well  as  a  presumed  reluctance  on  the  part  of  fellow  immigrants  to 
cooperate  with  the  police,  especially  if  the  police  in  their  homeland 
were  viewed  as  agents  of  an  oppressive  regime. 

The  NYPD  has  relatively  few  police  officers  and  investigators 
who  are  fluent  in  Russian.  The  language  barrier  may  hinder  an  in- 
vestigation in  several  ways.  The  first  officers  or  detectives  to  arrive 
at  a  crime  scene  may  have  to  scramble  for  translators.  And  it  is 
tougher  to  field  traditional  undercover  operations  used  in  public 
morals  cases. 

For  example,  Russian-run  brothels  are  extremely  lucrative  but  do 
not  cater  to  non-Russian  clients.  We  have  attempted  to  use  under- 
cover "Johns"  who  do  speak  Russian,  but  even  they  require  an  in- 
troduction from  a  credible  go-between,  which  has  proven  difficult  to 
obtain. 

We  have  investigated  numerous  cases  involving  the  extortion  of 
Russian-owned  businesses,  sometimes  referred  to  as  "window  in- 
surance" or  "protection  money."  It  is  not  uncommon  for  complain- 
ants in  these  cases  to  cooperate  only  up  until  the  time  an  arrest 
is  made,  then  refuse  to  follow  through  on  the  prosecution. 

When  the  crime  is  murder,  witnesses  willing  to  cooperate  are 
also  scarce.  At  this  time,  I  would  like  to  introduce  Detective 
Cefarello,  who  will  provide  a  brief  overview  of  our  experience  with 
murder  investigations  of  Russian  crime  figures. 

Senator  Roth.  Detective  Cefarello? 

Mr.  Cefarello.  Good  afternoon.  My  name  is  Detective  Ralph 
Cefarello.  I  am  currently  assigned  to  a  new  citywide  investigative 
unit  specifically  created  to  combat  the  criminal  activity  you  are 
hearing  about  today. 

In  the  past  15  years,  there  has  been  a  total  of  42  murders  and 
24  attempted  murders  in  New  York  City  known  to  be  linked  to 
Russian/Eurasian  criminal  organizations.  Many  of  the  murder  vic- 
tims served  time  in  prison  in  the  former  Soviet  Union  or  were 
known  to  engage  in  criminal  activity  there.  Several  were  accom- 
plished athletes  in  contact  sports  such  as  wrestling,  boxing,  or  one 
of  the  martial  arts.  Commonly,  the  motive  for  these  murders  in- 
volved disputes  over  profits  from  illegal  activities  and  turf  battles 
over  extortion  rights. 

Witnesses  in  these  cases  were  often  less  than  forthcoming.  Take, 
for  example,  the  murder  in  Brooklyn  of  a  former  Soviet  heavy- 
weight champion.  This  individual,  who  was  involved  in  strong-arm 
extortion  and  narcotics  trafficking,  was  shot  and  killed  in  front  of 
a  Russian  nightclub  on  Brighton  Beach  Avenue.  He  had  been 
among  some  75  guests  at  a  private  party.  His  killer  had  also  been 
present  during  the  festivities. 


56 

We  talked  to  everyone  who  had  been  present  at  the  party.  The 
story  was  the  same,  interview  after  interview:  No  one  saw  or  heard 
anything.  No  one  could  identify  the  victim.  No  one  could  identify 
his  killer. 

Despite  these  types  of  investigative  obstacles,  we  have  been  able 
to  clear  15  of  these  42  homicides,  and  we  expect  to  prosecute  those 
responsible  for  numerous  other  murders  pursuant  to  active  RICO 
investigations  with  Federal  prosecutors. 

It  is  important  to  note  that  cooperation  among  local,  State  and 
Federal  law  enforcement  agencies  remains  an  essential  ingredient 
of  any  successful  strategy  to  address  this  problem.  NYPD  detec- 
tives meet  regularly  with  representatives  of  other  agencies.  These 
information-sharing  sessions  have  proven  quite  productive. 

Finally,  thank  you  for  your  interest  in  a  crime  problem  we  are 
working  so  hard  to  eradicate.  We  already  enjoy  the  leadership  and 
support  of  Mayor  Rudolph  W.  Giuliani  and  Police  Commissioner 
Howard  Safir.  Any  additional  Federal  resources  you  could  send  our 
way  would  be  greatly  appreciated  and  well-used  to  permanently 
stunt  the  growth  of  Russian  organized  crime  criminal  activity  on 
our  shores. 

Senator  ROTH.  Thank  you,  Mr.  Cefarello. 

Mr.  Pollard? 

TESTIMONY  OF  WILLIAM  POLLARD,i  DETECTIVE,  ORGANIZED 
CRIME  INTELLIGENCE  DIVISION,  LOS  ANGELES  POLICE  DE- 
PARTMENT 

Mr.  Pollard.  Good  afternoon,  Senator  Roth,  Members  of  the 
Subcommittee.  I  am  Detective  William  Pollard,  Los  Angeles  Police 
Department,  Organized  Crime  Intelligence  Division. 

I  will  present  abbreviated  remarks  regarding  organized  crime  in 
the  Los  Angeles  area,  and  I  request  that  my  full  written  statement 
be  entered  into  the  record. 

"Russian  organized  crime"  is  a  term  covering  more  than  150  eth- 
nic backgrounds  and  120  languages.  The  common  denominator  is 
the  Russian  language,  spoken  by  most  due  to  the  Soviet  rule  for 
70  years  or  so. 

Historically,  in  the  greater  Los  Angeles  area,  the  problem  started 
in  the  mid-seventies  when  the  Soviets  released  Russian  Jews  and 
Armenians,  and  they  came  to  the  United  States  as  refugees.  In 
these  groups  of  emigres  were  criminal  elements  that,  upon  arriving 
here,  continued  their  criminal  activities.  In  fact,  some  of  the 
emigres  who  were  admitted  as  Jewish  refugees  were  not  even  Jew- 
ish and  had  spent  time  in  Russian  prison.  At  the  same  time,  Arme- 
nian refugees  were  also  arriving  in  the  United  States  with  a  simi- 
lar pattern,  having  a  percentage  of  criminals. 

It  is  also  believed  that  the  Soviet  Union  used  the  refugee  pro- 
gram to  send  KGB  agents  and  operatives  into  our  population. 

Since  the  breakup  of  the  Soviet  Union,  we  see  a  much  more  di- 
verse ethnic  background  in  the  criminal  element  coming  here.  Cur- 
rently, the  greater  Los  Angeles  area  has  the  second-largest  Rus- 
sian-speaking population,  excluding  Armenians,  in  the  United 
States  and  the  largest  population  of  Armenians  outside  of  Armenia. 


'  The  prepared  statement  of  Mr.  Pollard  appears  on  page  182. 


57 

The  city  of  Glendale,  which  adjoins  the  city  of  Los  Angeles,  finds 
that  25  percent  of  their  population  is  Armenian,  with  half  of  those 
being  Soviet  or  Russian  Armenian. 

Along  with  our  resident  populations,  there  is  a  growing  number 
of  tourist  or  "shadow  people,"  transient  individuals  who  come  and 
go,  many  times  engaging  in  criminal  activities.  While  in  the  past, 
no  real  structure  was  observed  in  the  Jewish  or  Armenian  groups, 
today,  investigators  from  the  Los  Angeles  Police  Department  and 
the  Glendale  Police  Department  see  a  growth  of  structures  in  sev- 
eral Armenian  criminal  groups. 

Other  Russian  groups  that  still  do  not  appear  to  have  a  structure 
in  the  United  States  seem  to  be  arms  of  structured  groups  in  the 
former  Soviet  Union.  This  lack  of  observable  structure  is  the  main 
reason  why  law  enforcement  in  Southern  California  did  not  see  or- 
ganized crime  as  the  upcoming  problem  it  is  today. 

Over  the  years,  what  were  first  seen  as  career-type  criminals 
committing  extortions  on  their  own  and  frauds  against  our  society, 
with  a  small  amount  of  violence,  now  commit  very  sophisticated, 
major  fi^auds  and  a  high  degree  of  violence.  Much  of  this  is  due  to 
the  background  of  the  new  criminal  who  may  have  been  a  KGB 
agent,  a  police  officer,  a  politician,  or  a  well-educated  professional 
in  his  country. 

A  few  years  ago,  the  Glendale  Police  Department  arrested  a 
former  police  chief  of  the  city  of  Yerevan,  Armenia's  capitol,  on 
charges  of  extortion,  rape,  and  kidnapping. 

Some  examples  of  the  types  of  criminal  activities  that  have  been 
investigated  by  law  enforcement  in  the  greater  Los  Angeles  area 
are  the  following.  In  1983,  a  Russian  businessman  became  indebted 
to  organized  crime  figures  for  $50,000  at  a  30  percent  interest  rate. 
For  the  next  8  years,  he  had  to  borrow  another  $70,000  to  make 
payments.  During  that  time,  he  repaid  $480,000.  In  1991,  he  and 
his  family  were  being  threatened  by  organized  crime  figure  for  re- 
payment, and  he  finally  came  to  law  enforcement  for  help.  The  sus- 
pects were  arrested,  and  we  had  two  convictions  in  that  case. 

Nineteen  ninety-one  was  also  the  year  that  the  Smushkevich 
brothers  were  arrested  on  the  basis  of  a  task  force  investigation  in- 
volving Federal,  State  and  local  agencies.  The  medical  fraud  in- 
cluded false  billing  through  mobile  medical  laboratories  and  doc- 
tors' offices.  This  was  the  largest  medical  care  fraud  case  in  U.S. 
history.  Fraudulent  billings  were  in  excess  of  $1  billion. 

In  1992,  a  few  Russian  visitors  to  Los  Angeles  who  had  been 
made  indentured  servants  in  a  scheme  to  commit  fraud  with  checks 
and  credit  cards  wished  to  return  home  to  Russia.  The  Russians 
running  the  scheme  would  not  allow  the  visitors  to  leave  and  held 
their  passports  and  visas.  An  argument  ensued,  and  the  visitors 
murdered  the  two  Russian  captors.  Los  Angeles  County  sheriffs  re- 
sponded to  a  call  from  the  neighbors  regarding  a  car  in  the  drive- 
way with  the  motor  running  for  a  long  period  of  time  and  discov- 
ered the  suspects  attempting  to  eliminate  identification  on  the  bod- 
ies by  removing  the  fingertips  and  removing  the  bullets  from  the 
bodies. 

In  1994,  a  group  of  Armenians  who  had  been  extorting,  kidnap- 
ping and  in  general  terrorizing  the  Armenian  community  for  the 
past  13  years  were  arrested  and  convicted. 


58 

In  1995,  a  task  force  of  the  Los  Angeles  Office  FBI,  IRS,  Depart- 
ment of  Defense,  California  Department  of  Justice,  the  Los  Angeles 
Police  Department  and  the  Long  Beach  Police  Department  inves- 
tigating fuel  tax  fraud  that  also  involved  using  fraudulent  IRS 
forms,  rigging  fuel  pumps  and  blending  additives  to  extend  fuel 
concluded  by  arresting  25  individuals  on  various  RICO  violations. 
The  ringleader,  Joe  Mikhailian,  was  identified  as  the  "godfather"  of 
the  Armenian  mafia  in  Los  Angeles. 

Current  joint  investigations  are  underway  with  the  Los  Angeles 
Police  Department,  the  Glendale  Police  Department,  and  the  FBI 
on  a  number  of  murders  involving  the  garment  industry.  There 
have  been  5  murders,  5  attempted  murders,  shootings,  bombings 
and  extortions  in  the  Los  Angeles-Glendale  communities  that  are 
believed  to  be  related  to  organized  crime  in  the  garment  industry. 
Of  all  of  these  crimes,  there  has  only  been  one  conviction  for  mur- 
der. 

There  are  numerous  investigations  by  several  agencies  into  ongo- 
ing medical  frauds,  many  of  which  have  spread  into  other  States 
as  pressure  is  applied  in  the  Southern  California  area.  These 
frauds  seem  to  be  based  on  staged  or  manufactured  auto  accidents 
and  involve  not  only  doctors,  but  attorneys  as  well. 

Law  enforcement  is  trying  to  combat  the  rapidly  growing  prob- 
lem of  Russian  organized  crime  by  working  together  on  cases  and 
forming  task  forces  needed  to  solve  the  problem.  In  1991,  the  Los 
Angeles  Police  Department,  the  Los  Angeles  FBI,  and  the  Los  An- 
geles County  Sheriffs  Office  organized  a  regional  meeting  of  law 
enforcement  professionals  known  as  the  Soviet  Organized  Crime 
Intelligence  Team,  or  "SOCIT."  The  California  Department  of  Jus- 
tice has  been  taking  information  from  all  sources  and  building  a 
database  on  Russian  organized  crime  to  benefit  law  enforcement  in 
tracking  the  problem.  It  also  has  been  instrumental  in  organizing 
two  more  information-sharing  groups  in  Northern  California. 

Some  of  the  problems  for  law  enforcement  in  dealing  with  the 
new  criminals  include  a  lack  of  trust  in  the  community  of  law  en- 
forcement based  on  their  experiences  in  the  old  country.  Immi- 
grants are  subjected  to  threats  from  mafia  members  and  feel  that 
they  have  nowhere  to  turn.  Law  enforcement  must  make  inroads 
into  the  community  to  build  trust.  They  must  also  interact  with 
other  agencies  on  the  local.  State,  national  and  international  levels 
to  counteract  the  highly  mobile,  violent  Russian  criminals  who 
today  deal  with  any  other  crime  group  in  the  world  to  continue 
their  criminal  enterprise. 

Prosecutors  need  to  be  educated  on  the  subject  and  make  every 
efibrt  to  prosecute  every  case,  no  matter  how  trivial  it  may  seem. 
There  also  needs  to  be  an  international  database  open  to  all  law 
enforcement.  Today,  with  the  rapid  growth  of  this  problem,  it  is  im- 
perative that  agencies  and  departments  find  resources  for  training, 
manpower  and  equipment  to  effectively  combat  the  problem. 

This  concludes  my  statement.  I  will  be  happy  to  answer  ques- 
tions. 

Senator  ROTH.  Thank  you,  Mr.  Pollard. 

We  will  now  hear  from  the  undercover  police  officer.  Please  pro- 
ceed. 


59 

TESTIMONY  OF  AN  ANONYMOUS  UNDERCOVER  POLICE 
OFFICER  1  FROM  ANOTHER  CITY 

Anonymous  Witness.  Senators,  I  welcome  the  opportunity  to  ap- 
pear before  your  distinguished  committee. 

I  was  born  and  raised  in  Russia.  I  emigrated  from  Russia  to  the 
United  States  in  the  1970's.  I  have  been  a  law  enforcement  officer 
for  more  than  15  years.  I  have  served  in  different  capacities — uni- 
formed patrol,  homicide  detective  and  narcotics  detective. 

During  the  past  2  years,  I  have  been  involved  in  numerous  Rus- 
sian organized  crime  investigations. 

Due  to  the  fact  that  I  am  involved  in  a  number  of  extremely  sen- 
sitive investigations,  I  am  testifying  anonymously  in  order  not  to 
jeopardize  these  cases  or  the  safety  of  others. 

As  I  said  earlier,  I  grew  up  on  the  former  Soviet  Union.  I  was 
raised  under  the  Communist  system,  and  I  believe  that  I  know  the 
thinking  of  the  people  who  were  brought  up  in  that  system. 

I  am  very  active  in  the  Russian  emigre  community  in  the  city  in 
which  I  live.  I  attend  most  of  the  gatherings  of  the  emigres  and 
continue  to  be  very  much  in  touch  with  the  Russian  emigres  and 
their  culture.  I  receive  and  read  most  of  the  literature  that  is  pub- 
lished in  the  Russian  language  in  both  the  former  Soviet  Union  as 
well  as  here  in  the  United  States. 

Now  I  would  like  to  touch  on  the  subject  of  the  difference  be- 
tween the  cultures  in  the  Republics  of  the  former  Soviet  Union  and 
the  United  States. 

During  the  Communist  regime,  for  many  people  in  the  former 
USSR,  the  moral  values  accepted  in  a  free  society  were  "destroyed," 
maybe  with  a  few  exceptions.  Russian  people  grew  up  with  the  un- 
derstanding that  stealing  something  from  their  place  of  employ- 
ment is  not  a  crime — maybe  because  one  was  not  stealing  from  a 
friend  but  rather  from  a  system. 

They  also  grew  up  with  the  understanding  that  the  rules  were 
made  to  be  bent  or  bypassed.  That  mentality,  philosophy  and  up- 
bringing explains  why  some  of  the  Russian  emigres,  many  of  whom 
were  educated,  family  people,  got  involved  in  white  collar-type 
criminal  activity  here  in  the  United  States. 

Up  until  perestroika,  the  method  by  which  success  was  judged  in 
the  USSR  was  the  level  of  a  person's  education.  Doctors,  engineers, 
teachers  and  scientists  were  all  accorded  a  somewhat  higher  status 
in  society.  Wealth  was  not  a  factor  as  a  worker  in  a  factory  was 
making  as  much  money  as  a  doctor  did.  And  the  people  who  did 
make  money  in  the  underground  economy  or  black  market  oper- 
ations were  concealing  their  wealth. 

After  perestroika,  this  situation  was  reversed,  and  the  wealthy 
people  rose  to  the  top  of  society.  With  perestroika,  organized  crime 
flourished  in  Russia. 

Now  I  would  like  to  explain  how  these  criminal  groups  emerged. 
There  were  a  number  of  young  people  who  were  energetic  but  im- 
patient or  unable  to  build  up  their  own  businesses  over  a  period 
of  time.  These  people  started  to  form  criminal  groups  based  on 
their  affiliations  with  neighborhoods,  cities,  or  ethnicity.  The 
groups  were  led  by  either  professional  criminals  or  people  with 


^The  prepared  statement  of  an  Anonymous  Undercover  Police  Officer  appears  on  page  197. 


60 

leadership  abilities  and  similar  interests.  These  groups  started  to 
prey  on  the  new  Russian  business  society.  They  continued  to  grow, 
and  some  of  the  criminal  organizations  are  now  several  thousand 
members  strong.  They  would  extort  money,  kidnap  people  for  ran- 
som, and  organized  collection  agencies  which  used  very  unorthodox 
methods. 

Another  new  industry  began  to  emerge,  that  of  "murder  for  hire." 
Business  people  would  use  these  hired  killers  to  wipe  out  their 
competition  and  thereby  give  a  lesson  to  others:  Do  not  fool  around 
with  my  company  or  the  area  that  I  am  operating  in. 

Information  has  been  developed  that  many  of  these  murders 
were  committed  in  Russia  by  people  with  extensive  military  back- 
grounds. These  actions  forced  the  business  people  to  each  begin 
looking  for  "protection."  And  a  new  and  very  profitable  business, 
called  "krisha,"  meaning  "roof  in  English,  came  into  being. 

Very  few  businesses  in  Russia  could  survive  without  this  protec- 
tion. Up  to  50  percent  of  their  income  was  diverted  by  the  legiti- 
mate businesses  to  criminal  organizations  in  return  for  this  protec- 
tion. 

With  the  new  ability  to  travel  freely,  we  see  Russian  criminal  or- 
ganizations establishing  their  roots,  their  ties,  here  in  the  United 
States  of  America. 

Another  important  point  is  that  during  the  Communist  regime, 
there  was  in  effect  a  system  where  a  privileged  class  of  the  Com- 
munist government  officials  was  developed.  There  was  almost  a 
closed  society  of  the  Communist  bureaucracy,  and  it  was  nearly  im- 
possible to  become  a  part  of  it  unless  one  was  well-connected. 

However,  with  the  dismantling  of  the  Soviet  Union,  these  people 
remained  in  office,  but  no  longer  under  the  Communist  system 
which  guaranteed  them  a  better  life.  They  began  to  see  that  money 
is  the  criterion  on  which  people  were  judged;  yet  they  had  the 
power  to  issue  licenses,  permits,  valuable  government  contracts,  set 
customs  duties  on  goods  imported  into  the  former  Soviet  Union,  or 
set  standards  for  the  export  of  Russia's  valuable  commodities — for 
example,  its  natural  resources. 

Many  of  these  government  officials  began  to  take  advantage  of 
their  positions  due  to  this  perception.  They  or  members  of  their 
families  became  "partners"  in  business  enterprises  or  in  effect 
"sold"  their  power  and  authority. 

Information  developed  shows  that  many  Russian  government  of- 
ficials, working  on  a  modest  salary,  amassed  vast  sums  in  this 
fashion.  These  same  corrupt  officials  put  the  profits  from  this  activ- 
ity in  bank  accounts  all  over  the  world  and  purchase  real  estate  or 
other  property  in  various  countries,  including  the  United  States  of 
America. 

In  addition,  many  of  the  former  intelligence  and  law  enforcement 
agents  and  leaders  perceived  that  they  were  "on  the  bottom,"  so  to 
speak,  of  the  new  and  emerging  wealthy  Russian  society.  Their 
services  and  knowledge  became  a  valuable  commodity  to  the 
emerging  criminal  groups. 

In  speaking  with  a  number  of  sources  of  information  over  the 
past  couple  of  years,  I  have  learned  that  individuals  and  businesses 
affiliated  with  the  former  Soviet  intelligence  organizations  are 
being  used  by  the  Russian  organized  crime  groups  all  over  the 


61 

world,  including  in  the  United  States.  While  I  cannot  go  into  the 
specifics  of  this,  I  can  say  that  the  information  developed  shows 
that  the  former  intelligence  officers  are  working  in  league  with 
Russian  organized  crime  and  making  huge  profits  in  the  process. 

Among  the  strongest  Russian  criminal  organizations  which  are 
operating  today  are  the  following  groups.  The  Izmailovskaya  orga- 
nization, the  Solntsevskaya  organization,  the  Podolskaya  organiza- 
tion, Balashikhin,  Baumanskaya,  Chechen  criminal  organizations, 
Dagestani,  and  the  list  goes  on.  This  is  just  to  name  a  few. 

We  have  been  able  to  link  several  murders  which  have  occurred 
in  the  United  States  to  Russian  organized  crime  groups.  Informa- 
tion developed  shows  us  that  Russian  criminals  were  open  to  co- 
operation with  other  criminal  groups,  for  instance,  Italian  Amer- 
ican criminal  groups. 

We  also  developed  information  about  increasing  cooperation  be- 
tween Russian  organized  crime  and  Colombian  drug  cartels.  The 
Russian  organized  crime  groups  are  believed  to  be  heavily  involved 
in  the  laundering  of  the  profits  of  these  Colombian  drug  cartels. 
They  have  also  established  a  continuous  flow  of  cocaine  from  Co- 
lombia to  Eastern  Europe  and  Russia.  It  has  even  been  recently  re- 
ported in  newspapers  that  drug  dealers  in  Colombia  are  using 
former  Soviet  military  transport  aircraft  to  move  quantities  of  co- 
caine. 

To  describe  a  typical  activity  of  Russian  organized  crime  in  the 
United  States,  I  can  bring  the  following  example.  A  hardworking 
Russian  businessman  operating  in  a  heavily-populated  Russian 
area  of  a  major  city  is  visited  by  several  males.  They  tell  the  busi- 
nessman that,  either  for  a  certain  percentage  of  his  business  or 
regular  payments,  they  will  "protect"  his  business.  If  the  business- 
man replies  that  he  does  not  feel  that  he  needs  that  protection,  in 
the  near  future,  strange  things  will  happen  to  his  family  or  him- 
self. Robberies  may  take  place  at  his  establishment.  Acts  of  vandal- 
ism will  occur.  Threatening  phone  calls  will  be  received,  and/or  vio- 
lent acts  against  him  or  members  of  his  family  will  take  place. 

The  same  people  will  visit  the  businessman  again  and,  now  con- 
vinced that  he  does  need  protection,  the  businessman  will  start 
paying. 

Senators  I  have  been  asked  by  your  staff  whether  I  have  any  ad- 
vice for  the  Subcommittee  on  how  to  combat  Russian  organized 
crime.  I  would  like  to  make  a  few  suggestions  that  would  come  not 
only  from  me,  but  from  law  enforcement  personnel  with  whom  I  am 
working  on  Federal,  State  and  local  levels. 

Formal  task  forces  should  be  established  in  major  metropolitan 
areas,  consisting  of  Federal,  State  and  local  officers.  What  these 
task  forces  could  do  is  actively  gather  information  about  Russian 
organized  crime  activity  in  their  cities  and  conduct  investigations 
against  these  subjects.  The  task  forces  should  establish  liaison  con- 
tacts with  law  enforcement  agencies  throughout  the  world,  since 
Russian  organized  crime  groups  operate  on  a  global  level. 

One  of  the  most  glaring  gaps  in  the  fight  against  Russian  orga- 
nized crime  is  the  lack  of  an  extradition  treaty  between  the  United 
States  of  America  and  the  former  Soviet  Republics.  This  has  en- 
abled many  Russian  criminals  associated  with  organized  crime  and 
sought  as  fugitives  by  Russian  authorities  to  seek  refuge  in  the 


25-049  0-96 


62 

United  States.  By  the  same  token,  Russian  criminals  who  have 
been  committing  crimes  in  the  United  States  have  subsequently 
left  for  Russia  and  found  safe  haven  there. 

What  could  be  accomplished  by  addressing  these  matters,  how- 
ever, is  a  slowing  down  but  not  a  complete  halt  to  the  growing 
problem  of  Russian  organized  crime  in  the  United  States  of  Amer- 
ica. 

I  thank  you  again  for  the  opportunity  to  appear  before  your  dis- 
tinguished Subcommittee. 

Senator  ROTH.  Thank  you. 

Senator  Nunn? 

OPENING  STATEMENT  OF  SENATOR  NUNN 

Senator  NuNN.  Mr.  Chairman,  I  had  to  attend  a  funeral  this 
morning  and  regret  that  I  was  unable  to  be  here.  I  appreciate  your 
hard  work  and  the  work  of  the  staff  and  all  the  witnesses  who  have 
testified.  I  do  not  want  to  interrupt  the  flow,  so  I  will  just  put  my 
opening  statement  in  the  record  if  that  could  be  done,  and  I  will 
follow  your  questions. 

[The  prepared  statement  of  Senator  Nunn  follows:] 

PREPARED  OPENING  STATEMENT  OF  SENATOR  NUNN 

Thirty-three  years  ago  this  September,  Joseph  Valachi  testified  before  this  Sub- 
committee. His  unprecedented  testimony  gave  Congress  and  the  American  people 
their  first  insider's  view  of  a  criminal  organization  called  the  "La  Cosa  Nostra,  the 
LCN,  or  as  Valachi  called  it — "Our  Thing."  This  morning,  the  Permanent  Sub- 
committee on  Investigations  continues  in  that  same  tradition  by  holding  the  second 
in  a  series  of  Senate  hearings  exploring  the  activities  of  a  new  crime  group  operat- 
ing within  our  country  that  comes  from  the  territories  of  the  former  Soviet  Union — 
a  crime  group  that  many  have  compared  to  the  La  Cosa  Nostra  in  its  proclivity  to- 
ward violence  and  mayhem. 

As  we  will  hear  from  our  distinguished  witnesses  this  morning,  crime,  and  par- 
ticularly organized  crime,  has  become  one  of  the  most  dangerous  forces  to  arise  from 
the  collapse  of  the  Soviet  system.  It  has  cast  a  shadow  over  efforts  to  achieve  mar- 
ket reform  and  democratization  in  Russia  and  the  other  independent  republics,  and 
it  may  ultimately  pose  a  threat  to  peace  not  only  in  that  region  of  the  world,  but 
in  others  as  well.  As  such,  organized  crime  in  the  former  Soviet  Union  is  fast  becom- 
ing not  only  a  law  enforcement  nightmare,  but  a  potential  national  security  night- 
mare as  well. 

Hearings  last  month  concerning  a  year-long  probe  that  I  directed  into  the  pro- 
liferation of  weapons  of  mass  destruction,  underscores  these  concerns.  Numerous 
witnesses  testified  about  the  frightening  possibility  of  organized  crime  in  Russia,  or 
elsewhere,  obtaining  nuclear  weapons  or  fissile  material.  Although,  to  date,  none  of 
the  experts  contacted  by  the  Minority  staff  had  evidence  of  direct  organized  crime 
involvement  in  such  activity,  all  expressed  deepening  concern  that  such  an  event 
was  becoming  more  plausible. 

Today's  hearing  is  obviously  not  the  Subcommittee's  first  exposure  to  the  topic  of 
organized  crime  in  the  former  Soviet  Union.  As  one  of  my  staff  reminded  me  re- 
cently, 13  years  ago,  one  of  his  first  interviews  for  the  Subcommittee  was  with  the 
Philadelphia  police  and  dealt  with  "Soviet"  organized  crime  members  infiltrating  the 
jewelry  business  in  that  area.  However,  it  was  not  until  the  demise  of  the  Soviet 
regime  that  this  phenomena  took  on  greater  dimensions. 

In  May  of  1994,  under  my  direction  as  Chairman,  the  Subcommittee  explored  the 
activities  of  Russian  organized  crime  both  here  and  in  Europe.  At  that  time,  the 
Subcommittee  in  an  unprecedented  move,  brought  together  a  distinguished  panel  of 
international  law  enforcement  experts  consisting  of  Louis  Freeh,  Director  of  the 
Federal  Bureau  of  Investigations,  Hans-Ludwig  Zachert,  President  of  Germany's 
Bundeskriminalamt,  and  General  Mikhail  Yegorov,  First  Deputy  Minister  of  Rus- 
sia's Ministry  of  Internal  Affairs  and  the  Head  of  Russia's  Organized  Crime  Control 
Department.  That  hearing  represented  the  first  time  that  such  high-ranking  law  en- 
forcement officials  from  these  countries  had  testified  together  before  the  U.S.  Con- 
gress. Their  testimony  was  also  unique  in  that  it  described  a  problem  faced  by  all 


63 

three  countries — the  phenomenal  growth  of  organized  criminal  activity  in  the  terri- 
tories of  the  former  Soviet  Union. 

Our  1994  hearings  showed  that  unlike  the  first  half  of  this  century  when  the  La 
Cosa  Nostra  migrated  to  this  country  and  successfully  infiltrated  our  society  without 
any  major  law  enforcement  reaction,  today  law  enforcement  officials  on  both  con- 
tinents are  concerned  and  doing  something  about  this  problem.  I  am  encouraged  by 
this  response  from  American  law  enforcement  in  general,  and  more  specifically,  the 
FBI,  Customs  Service,  Internal  Revenue  Service,  and  other  State  and  local  law  en- 
forcement agencies  have  shown  in  confronting  Russian  organized  crime  before  it 
took  root.  I  particularly  want  to  praise  the  leadership  of  FBI  Director  Freeh  who 
has  called  for  greater  attention  to  this  important  phenomena.  Director  Freeh  along 
with  the  others  have  obviously  learned  from  the  mistake  we  previously  made  in  ig- 
noring the  La  Cosa  Nostra  until  they  were  too  well  entrenched  in  our  society. 

Today's  hearing  builds  upon  what  we  learned  in  1994.  We  will  focus  our  attention 
almost  exclusively  upon  Russian  organized  crime  activities  within  our  own  country's 
borders.  Our  purpose  this  morning  is  to  determine  the  true  nature  of  Russian  orga- 
nized crime  in  America  and  the  significance  of  this  criminal  phenomena.  More  spe- 
cifically: 

•  How  many  members  does  it  have,  how  is  it  organized,  who  are  its  leaders? 

•  How  big  is  the  Russian  organized  crime  problem  in  comparison  to  other  crime 
problems  such  as  gangs  in  Los  Angeles,  drug  trafficking  in  Miami,  the  mafia 
in  New  York? 

•  How  extensive  are  its  ties  to  other  organized  crime  groups  both  here  and 
abroad? 

•  How  wealthy  is  it?  What  are  its  ties  to  financial  institutions  both  here  and 
abroad? 

•  What  are  its  ties  to  criminal,  government  and  intelligence  elements  of  the 
former  Soviet  Union? 

Hopefully,  we  will  be  able  to  answer  many,  if  not  all,  of  these  questions.  At  the 
minimum,  I  expect  today's  hearings  will  help  us  all  to  sort  out  what  is  credible  and 
what  is  not;  what  is  the  real  and  what  is  fictional;  and,  what  is  the  threat  from 
what  is  merely  sensationalism.  This  latter  point  is  clearly  important  in  light  of  the 
comments  of  the  learned  Chairman  concerning  even  the  term  "Russian  organized 
crime". 

Clearly,  I  join  with  Senator  Roth  in  decrying  those  who  would  tarnish  every  Rus- 
sian or  every  emigre  from  the  former  Soviet  Union  with  that  term.  It  has  become 
merely  a  term  of  convenience  within  the  press  and  public  as  shorthand  for  criminals 
coming  from  any  one  of  the  many  new  states  created  out  of  the  former  Soviet  Union 
or  even  from  the  new  republics  of  Eastern  Europe.  Moreover,  it  is  equally  unfair 
to  paint  with  a  broad  brush  the  vast  majority  of  former  Soviet  citizens  currently  re- 
siding in  America  who  are  law-abiding,  hard-working  and  extremely  loyal  members 
of  our  society.  In  fact,  as  Senator  Roth  has  already  noted,  these  new  immigrants 
to  our  country  are  more  likely  than  any  others  to  be  the  victims  of  this  criminal 
activity.  As  with  the  history  of  all  other  ethnic-related  organized  crime  groups  in 
our  country,  the  criminals  usually  prey  upon  their  own  ethnic  community,  hoping 
to  profit  from  their  fellow  countrymen's  ignorance  and/or  mistrust  of  their  new  coun- 
try's laws  and  government. 

It  is  important  that  we  keep  this  in  mind  as  we  listen  to  today's  witnesses.  It  is 
essential  that  we  honestly  assess  the  threat  from  Russian  organized  crime  so  that 
we  correctly  balance  our  government's  response.  We  must  be  judicious  in  our  re- 
sponse so  that  we  do  not  trample  upon  long-cherished  democratic  principles. 

In  closing,  I  wish  to  thank  the  efforts  of  Senator  Roth  and  his  staff  in  preparing 
today's  hearings.  I  commend  their  efforts  and  once  again  congratulate  Senator  Roth 
on  his  leadership  in  this  area  of  utmost  concern  to  our  country. 

Senator  ROTH.  Well,  thank  you,  Senator  Nunn.  I  want  to  say 
once  again  that  we  appreciate  your  cooperation  and  that  of  your 
staff  in  this  investigation. 

Detective  Mackey,  you  stated  that  Brighton  Beach  is  a  hub  for 
Russian-born  criminals.  Why  is  this  true? 

Mr.  Mackey.  That  is  correct.  Chairman  Roth.  Brighton  Beach 
has  traditionally  been  the  first  stop  for  new  former  Soviet  Union 
emigres,  like  the  Chinatowns  or  Little  Italys  or  the  like  in  New 
York  or  other  big  cities.  It  is  a  small,  oceanfront,  tightly-knit  com- 


64 

munity  where  networking,  connections  and  ethnic  aUiance  make 
Brighton  Beach  the  ideal  place  to  ply  their  trade. 

The  prevailing  attitude  of  not  wanting  to  be  labelled  a 
"stukatch,"  or  informant,  an  attitude  which  is  a  residue  of  life  in 
the  former  Soviet  Union,  makes  Brighton  Beach  convenient  for 
criminals.  An  example  of  this  is  indicated  by  pen  registers  or  wire- 
taps of  investigations  outside  of  New  York  jurisdiction  which  lead 
back  to  Brighton  Beach. 

No  matter  what  agency  or  its  jurisdiction,  the  tentacles  of  Brigh- 
ton Beach  are  present. 

Senator  RoTH.  Has  Brighton  Beach  changed  notably  since  the 
breakup  of  the  Soviet  Union  and  the  resulting  influx  of  Russian  im- 
migrants? 

Mr.  Mackey.  Yes,  Mr.  Chairman.  Changes  in  Brighton  Beach 
that  we  have  been  observing  include  younger  criminals  in  Brighton 
Beach  with  a  propensity  toward  intimidation,  with  intelligence  in- 
dicating that  they  have  been  sent  here  to  specifically  engage  in 
criminal  activity. 

Additionally,  we  have  seen  more  violent  acts  than  in  the  past,  as 
indicated  by  a  recent  double  homicide  in  which  both  victims  were 
totally  dismembered. 

Intelligence  indicates  that  many  of  these  criminals  are  transient, 
with  the  ability  to  move  about  freely. 

Senator  ROTH.  You  indicated  that  they  were  sent  here;  do  you 
mean  they  may  continue  to  have  ties  with  criminal  elements  back 
in  Russia? 

Mr.  Mackey.  That  is  correct.  Chairman  Roth.  We  have  had  intel- 
ligence briefings  that  indicate  that  these  criminals  plying  their 
trade  in  Brighton  Beach  still  travel  back  and  forth  freely  between 
Brooklyn  and  the  former  Soviet  Union. 

Senator  RoTH.  Detective  Cefarello,  Anthony  Casso  testified  ear- 
lier today  about  the  killing  of  Vladimir  Resnikov  outside  of  the 
Odessa  Restaurant  in  Brighton  Beach.  Are  you  familiar  with  this 
murder,  and  if  so,  has  anybody  been  charged  with  this  crime? 

Mr.  Cefarello.  Yes,  Chairman  Roth,  I  am  familiar  with  the 
murder,  and  as  of  this  time,  no  one  has  been  charged  in  that  mur- 
der. 

Senator  ROTH.  Mr.  Casso  also  testified  that  Resnikov  was  killed 
by  Joey  Testa  of  the  Lucchese  organized  crime  family.  Is  this  a 
plausible  explanation  of  the  murder? 

Mr.  Cefarello.  Yes,  it  is  plausible.  The  murder  investigation 
show  witness  statements  and  forensic  and  some  individual  state- 
ments that  make  that  plausible,  yes. 

Senator  RoTH.  You  testified  that  there  have  been  more  than  40 
murders 

Mr.  Cefarello.  Forty-two,  yes. 

Senator  Roth  [continuing].  Forty-two — in  New  York  City  linked 
to  Russian  organized  crime.  What  is  the  explanation  as  to  why 
there  have  been  so  many  murders?  Have  you  found  any  recurring 
patterns  or  methods  used  by  the  Russians  to  commit  these  mur- 
ders? 

Mr.  Cefarello.  The  prevalent  weapon  of  choice  used  by  Rus- 
sians is  usually  a  semiautomatic  handgun,  the  high-powered  semi- 
automatic handguns,  although  "streetsweeper"  shotguns  and  auto- 


65 

matic  machine  pistols  have  been  used.  Several  victims  have  been 
brutally  stabbed,  as  Detective  Mackey  stated,  and  two  were  totally 
dismembered. 

As  far  as  why  they  occur,  I  would  say  that  probably  as  in  any 
other  organized  crime  organization  in  the  past,  it  would  probably 
have  a  lot  to  do  with  greed  and  someone  trying  to  take  over  your 
territory  or  someone  trying  to  get  some  of  that  tax  money  that  you 
heard  about  earlier  from  the  gas  scams.  With  millions  and  millions 
of  dollars  passing  hands,  someone  is  going  to  get  killed  in  between. 

Senator  Roth.  Do  you  think  this  is  still  continuing? 

Mr.  Cefarello.  From  what  I  have  heard  today  and  from  what 
I  have  heard  before,  yes. 

Senator  ROTH.  Detective  Pollard,  it  is  hard  to  see  you  because  of 
the  screen.  You  testified  about  "shadow  people"  who  are  hired  by 
Russian  organized  criminal  groups  to  travel  to  the  United  States 
to  commit  murder  and  other  violent  crimes.  Can  you  provide  us 
with  examples  of  crimes  in  the  Los  Angeles  area  that  you  suspect 
were  committed  by  these  "shadow  people"? 

Mr.  Pollard.  Yes,  Senator.  Probably  the  best  example  would  be 
the  Carole  Little  murders,  which  is  the  garment  industry  case  that 
I  referred  to.  In  that  case,  there  have  been  5  murders,  5  attempted 
murders,  and  numerous  other  violent  crimes.  It  is  well-believed 
that  most  of  these,  or  a  good  percentage  of  them  at  least,  have  been 
done  by  these  "shadow  people"  or  visitors  coming  in.  It  leaves  de- 
tectives with  dead-ends  when  they  are  investigating. 

Senator  ROTH.  Did  they  go  back  to  Russia  afterwards — is  that 
what  happens? 

Mr.  Pollard.  Yes.  The  information  we  get  from  the  street 
sources  indicates  that  they  will  come  in  on  a  flight  from  Moscow 
to  Los  Angeles  on  a  Saturday;  there  is  another  flight  from  Los  An- 
geles to  Moscow  on  Wednesday.  They  will  come  in  on  one  of  those 
flights,  do  whatever  they  have  been  hired  to  do,  and  be  out  on  the 
next  flight. 

Senator  RoTH.  In  your  statement.  Detective  Pollard,  you  discuss 
the  problems  of  L-1  visa  fraud  enabling  Russian  criminals  to  enter 
the  United  States.  How  serious  a  problem  is  this,  and  what  is 
being  done,  if  anything,  to  help  solve  it? 

Mr.  Pollard.  That  problem  is  a  serious  problem  right  now. 
There  is  an  ongoing  investigation  by  the  State  Department  that  we 
are  assisting  with.  The  scenario  on  it  is  that  a  Russian  crime  figure 
will  go  to  the  Moscow  Embassy  and  obtain  a  B-1  or  B-2  visitor 
visa,  will  come  to  the  United  States,  set  up  a  storefront  or  a  mail- 
drop-type  business,  write  himself  a  letter  of  invitation,  saying  that 
he  is  needed  for  some  work  in  that  business,  return  to  Moscow  with 
the  letter,  take  it  back  to  the  Embassy,  trade  in  his  visitor  visa  for 
a  work  visa  and  come  back;  he  will  then  write  more  letters  to  more 
people  in  his  organization  in  Russia  and  have  them  come  here. 
They  will  use  that  storefront  business  to  launder  money  and  to 
cover  whatever  their  criminal  enterprise  is. 

Like  I  said,  the  State  Department  has  an  ongoing  investigation 
nationwide  on  that;  local  and  State  agencies  are  assisting  with 
feeding  information  and  helping  as  they  can. 

Senator  ROTH.  I  was  struck  by  a  line  in  your  statement  where 
a  Russian  source  said,  "The  only  thing  I  fear  is  deportation,  and 


66 

you  won't  do  it."  The  Subcommittee  has  investigated  the  problem 
of  criminal  aliens,  and  the  Senate  recently  adopted  an  amendment 
that  I  cosponsored  to  simplify  and  expedite  the  deportation  of 
criminal  agents. 

Do  you  believe  that  deportation  is  an  effective  weapon? 

Mr.  Pollard.  Yes,  sir.  I  think  it  would  be  a  highly  effective 
weapon  if  we  could  use  it.  The  problems  that  have  come  up  in  the 
past  as  far  as  using  it,  especially  with  the  refugee  statuses,  have 
been  a  real  hindrance.  With  the  changes  that  have  been  made  and 
should  be  made  in  the  future,  I  think  it  would  be  a  very  effective 
weapon. 

Senator  Roth.  I  would  now  like  to  turn  to  our  undercover  officer. 
You  discussed  several  organized  crime  groups  based  in  the  former 
Soviet  Union.  Do  any  of  these  groups  operate  in  the  United  States, 
and  what  crimes  do  they  engage  in? 

Anonymous  Witness.  Yes,  Senator.  We  have  developed  informa- 
tion that  the  following  Russian  organized  crime  groups  have  estab- 
lished their  ties  in  several  major  metropolitan  areas  in  the  United 
States.  They  are  the  Izmailovskaya  organization,  the  Solntsevskaya 
organization,  the  Chechen  criminal  organization,  the  Taganskaya 
criminal  organization,  and  there  are  others  that  are  still  under  in- 
vestigation. 

Senator  ROTH.  Now,  as  a  typical  example  of  Russian  organized 
criminal  activity,  you  described  the  extortion  of  a  Russian  business- 
man who,  after  he  is  threatened  and  his  business  vandalized,  de- 
cides to  pay.  If  he  were  to  ask  you,  "What  should  I  have  done?"  how 
would  you  have  answered  him? 

Anonymous  Witness.  Senator,  that  is  an  extremely  difficult 
question  to  answer.  As  a  law  enforcement  officer,  I  would  suggest 
that  the  businessman  should  file  a  complaint  with  the  appropriate 
law  enforcement  agency.  However,  putting  myself  in  the  position  of 
the  Russian  businessman,  and  understanding  the  limitation  of  law 
enforcement  to  protect  the  individual  and  his  family  on  a  continu- 
ing basis,  I  would  suggest  that  he  peacefully  resolve  this  matter  by 
cooperating  with  those  who  approached  him. 

Senator  ROTH.  So  in  other  words,  to  put  it  briefly,  as  a  friend, 
you  would  tell  him  to  pay? 

Anonymous  Witness.  Right. 

Senator  ROTH.  Let  me  ask  you  this  question.  You  have  been  a 
police  officer,  as  I  understand  it,  for  several  years  in  this  country. 

Anonymous  Witness.  More  than  15. 

Senator  Roth.  How  do  you  see  the  activities  of  the  Russian 
criminal  groups  changing  over  that  period  of  years? 

Anonymous  Witness.  It  is  becoming  well-organized,  well-funded; 
they  are  operating  with  huge  amounts  of  money.  They  are  becom- 
ing more  and  more  sophisticated. 

Senator  ROTH.  In  other  words,  they  are  becoming  more  struc- 
tured, better  organized — more  effective? 

Anonymous  Witness.  More  effective  and  integrated  into  the 
American  business  community. 

Senator  Roth.  Do  you  see  them  investing  in  a  major  way  in  le- 
gitimate businesses? 

Anonymous  Witness.  Yes,  Senator. 


67 

Senator  ROTH.  Let  me  ask  all  of  you  officers  this  question.  You 
are  the  first  line  of  defense  against  Russian  organized  crime.  Are 
you  satisfied  with  the  level  of  cooperation  you  are  receiving  from 
State  and  Federal  agencies? 

Mr.  Mackey? 

Mr.  Mackey.  Chairman  Roth,  as  a  representative  of  the  New 
York  City  Police  Department,  I  can  honestly  say  that  although 
interagency  cooperation  does  exist,  there  is  certainly  need  for  im- 
provement. 

We  have  had  homicide  investigations  stymied  because  of  parallel 
investigations  involving  the  New  York  City  Police  Department  and 
other  agencies,  where  we  are  interested  in  solving  a  homicide,  and 
they  have  their  own  agenda,  and  the  forthrightness  or  the  passing 
on  of  information  did  not  occur  in  certain  situations,  which  left  us 
frustrated  and  unable  to  get  certain  goals  accomplished. 

So  we  certainly  need  to  address  that  problem  and  get  some  egos 
out  of  the  way  and  get  some  major  agency  heads  to  sit  down  and 
actually,  instead  of  making  promises,  to  actually  put  some  bite  into 
what  they  are  referring  to  and  get  things  done,  because  without 
this  cooperation  on  the  Federal  level  and  the  State  level  and  the 
local  level,  this  is  a  crime  problem  that  as  representatives  of  local 
police  departments,  we  cannot  take  on  by  ourselves. 

Senator  ROTH.  I  suppose  it  is  even  accentuated  by  the  fact  that 
not  only  are  they  involved  at  the  local  level,  but  you  have  the  inter- 
national aspects  of  these  criminal  elements  as  well.  But  I  think  you 
make  a  very  valid  point  and  one  that  gives  me  real  concern. 

Mr.  Mackey.  Chairman  Roth,  there  were  certainly  a  lot  of  prom- 
ises made  in  this  room  today,  and  I  certainly  hope  that  a  lot  of 
these  representatives  fi-om  these  different  agencies  come  through 
on  these  promises. 

Senator  Roth.  Well,  we  will  try  to  help  to  make  sure  they  do  in 
fact  follow  through,  because  you  are  exactly  right;  it  is  going  to 
take  cooperation  at  all  levels  of  Government. 

Mr.  Mackey.  Thank  you,  Mr.  Chairman. 

Senator  Roth.  Mr.  Cefarello? 

Mr.  Cefarello.  Yes,  I  agree  that  some  of  the  investigations  have 
been  stymied  by  Federal  and  city  people  not  getting  along  or  not 
sharing  information. 

However,  like  I  said  in  my  statement,  there  are  meetings  held 
regularly  with  ourselves  and  Customs,  INS,  the  State  organized 
crime  task  force  and  all  of  these  Federal  agencies  getting  together 
with  us,  and  we  are  doing  fairly  well  at  sharing  information. 

I  hope  that  in  the  case  of  the  Resnikov  killing  and  other  killings 
that  Mr.  Casso  spoke  about,  maybe  we  will  get  a  shot  at  talking 
to  him  and  finding  out  about  some  homicides  he  is  speaking  of; 
maybe  he  can  help  us  clear  them  up.  Maybe  a  Federal  agency  can 
help  in  that  way. 

Senator  ROTH.  Mr.  Pollard? 

Mr.  Pollard.  Mr.  Chairman,  at  the  present  time,  I  enjoy  a  real 
good  rapport  with  State  and  Federal  agencies  in  all  aspects 
through  our  meetings  and  our  joint  ventures  as  far  as  putting  cases 
together  and  even  the  task  force.  I  think  everybody  is  pretty  well 
aware  of  the  problems  and  that  we  have  to  work  together. 


68 

In  the  Los  Angeles  area,  most  agencies  are  working  together  to 
try  to  get  a  handle  on  this. 

Senator  ROTH.  Let  me  finally  turn  to  our  anonymous  witness.  Do 
you  have  any  comment? 

Anonymous  Witness.  Yes,  Chairman.  I  can  only  speak  for  the 
area  of  the  country  in  which  I  am  currently  working.  Although  we 
have  an  informal  cooperation  between  several  Federal,  State  and 
local  law  enforcement  agencies,  I  would  like  to  see  full-time  task 
forces  established  in  which  all  of  the  appropriate  agencies  will  con- 
tribute the  necessary  resources  and  effort  to  combat  this  growing 
problem. 

In  my  opinion,  no  one  agency  can  accomplish  this  task  alone. 

Senator  RoTH.  You  have  a  Russian  background.  Do  you  have  any 
suggestions  as  to  how  to  improve  cooperation  and  exchange  with 
the  Russian  authorities? 

Anonymous  Witness.  Yes,  Chairman.  I  would  like  to  see  a  liai- 
son established  between  the  law  enforcement  agencies  and  the  Rus- 
sian communities  in  major  metropolitan  areas.  I  would  like  to  see 
encouragement  from  the  law  enforcement  agencies  with  the  Rus- 
sian communities  to  join  the  law  enforcement  agencies. 

Senator  ROTH.  Thank  you. 

Senator  Nunn? 

Senator  NUNN.  Thank  you,  Mr.  Chairman. 

I  had  it  in  my  opening  statement,  as  I  believe  you  did  in  yours, 
Mr.  Chairman,  but  I  would  like  to  ask  the  police  officers  directly. 
We  talk  about  Russian  organized  crime,  but  it  sounds  to  me  as  if 
you  are  describing  a  much  broader  geographical  description  to  in- 
clude most  of  the  former  Soviet  Union  and  even  Eastern  Europe. 
Would  it  be  fair  to  say  that,  or  are  you  really  talking  about  Russia 
in  a  limited  geographic  sense? 

Could  I  ask  our  anonymous  witness  first? 

Anonymous  Witness.  Yes,  Senator.  When  I  am  referring  to  Rus- 
sian organized  crime,  I  am  referring  to  the  former  Soviet  Union  re- 
publics. 

Senator  NuNN.  The  whole  array,  including  Ukraine,  Kazakhstan, 
Central  Asia 

Anonymous  Witness.  All  15  repubhcs. 

Senator  NUNN.  Are  you  also  including  Eastern  Europe? 

Anonymous  Witness.  Yes,  Senator— Poland,  former  Czecho- 
slovakia. 

Senator  NuNN.  So  as  you  use  the  word  "Russian"  here,  it  is  a 
very  broad  description  of,  really,  the  former  Soviet  empire,  is  that 
right? 

Anonymous  Witness.  You  are  right.  Senator.  The  reason  I  am 
referring  to  "Russian  organized  crime"  is  because  they  all  speak 
Russian,  although  they  come  from  different  republics. 

Senator  NuNN.  So  the  common  denominator  is  speaking  the  Rus- 
sian language. 

Anonymous  Witness.  Right. 

Senator  Nunn.  Mr.  Mackey? 

Mr.  Mackey.  I  concur.  Senator  Nunn,  with  my  comrade — correc- 
tion, my  counterpart;  I  got  cared  away  there — I  concur  with  my 
counterpart  regarding  his  testimony.  As  previously  indicated,  the 
phrase  "Russian  organized  crime"  is  a  misnomer,  but  for  simplicity. 


69 

it  makes  things  a  lot  easier.  But  as  indicated,  we  are  also  encoun- 
tering Azerbaijanis,  Armenians,  Georgians,  Chechens — a  whole 
gamut  of  people  from  the  former  Soviet  Union — in  Brighton  Beach. 

Senator  NUNN.  Mr.  Pollard,  I  cannot  see  you,  but  I  think  you  can 
hear  me. 

Mr.  Pollard.  Yes,  sir. 

Senator  NuNN.  Do  you  concur  in  that,  or  do  you  have  a  different 
view? 

Mr.  Pollard.  Yes,  Senator,  we  concur  as  far  as  most  of  the  Rus- 
sian-speaking people.  In  the  Los  Angeles  area,  with  the  large  popu- 
lation of  Armenians,  we  do  separate  them  out,  and  although  they 
work  together  with  the  rest  of  the  Russians,  they  have  their  own 
community,  and  it  is  large  enough  that  we  have  a  team  that  works 
on  Armenians,  and  my  partner  and  myself  work  on  the  rest  of  the 
Russians. 

Senator  NuNN.  I  would  like  to  have  an  opinion  from  each  of  you, 
including  our  anonymous  witness,  as  to  how  you  compare  the  "Rus- 
sian" or  former  Soviet  Union  organized  crime  problem  in  your  com- 
munities with  other  organized  crime,  including  traditional  orga- 
nized crime,  the  LCN,  the  Medellin  cartel,  the  Jamaican  posse,  the 
various  gangs  that  we  have  seen,  the  Crips,  Bloods  and  so  forth  in 
Los  Angeles. 

As  a  general  question,  how  do  you  compare  the  degree  of  bad  in- 
fluence, destruction,  crime  and  so  forth  carried  out  by  the  Russian 
organized  criminals  compared  to  these  other  groups? 

Mr.  Mackey? 

Mr.  Mackey.  Senator  Nunn,  that  certainly  is  a  big  sphere  to  ad- 
dress. We  know  that  in  New  York  City,  as  in  other  large  cities 
where  we  had  traditional  organized  crime  or  La  Cosa  Nostra  in 
place,  that  the  Federal  Government  and  local  governments  have 
certainly  been  very,  very  effective  in  taking  down  their  empires, 
certainly  in  the  last  couple  of  years. 

We  do  have  the  cartels  in  place  in  New  York  City  involved  in 
narcotics,  which  are  being  addressed  by  different  units  of  the  police 
department,  and  the  Jamaican  posses  as  well. 

I  am  speaking  here  solely  about  Russian  organized  crime.  It  cer- 
tainly has  the  ability  and  the  potential  to  become  a  serious  threat 
to  New  York  City  if  not  checked  in  the  near  future.  It  certainly  has 
the  ability  to  move  its  tentacles  out  into  the  surrounding  tri-State 
area  as  well. 

Senator  NUNN.  Would  it  compare  with  the  LCN  now  that  the 
LCN  has  been  knocked  down  in  some  particular  families  and  so 
forth,  and  with  the  successes  we  have  had?  Which  would  be  more 
serious  now — the  "Russian"  organized  crime  problem  in  the  New 
York  area  or  the  LCN? 

Mr.  Mackey.  I  would  have  to  agree  with  other  members  of  my 
profession  that  certainly  LCN  has  the  capability  and  has  been  in- 
volved in  more  activity.  But  with  the  vacuum  recently  created  by 
the  major  take-downs  of  LCN  families  and  people  within  their  or- 
ganization, Russian  organized  crime,  again  as  a  misnomer,  is  cer- 
tainly standing  by  and  ready  to  fill  that  vacuum  if  we  are  not  there 
to  take  on  this  situation. 


70 

Senator  NUNN.  So  LCN  would  still  be  more  potent  now,  but  you 
think  the  potential  is  there  for  Russian  organized  crime  to  step  into 
the  vacuum  that  is  being  created? 

Mr.  Mackey.  Yes.  I  certainly  do  not  feel  there  is  anyone  in  the 
room  who  would  state  that  the  LCN  or  traditional  organized  crime 
has  been  completely  decimated  by  law  enforcement.  We  know  that 
they  still  exist;  however,  we  have  been  chipping  away  strongly  over 
the  past  couple  of  years  and  making  great  inroads.  But  again,  as 
I  stated,  the  Russian  organized  crime — certainly,  it  is  vying  for 
power  and  it  is  out  there,  and  we  have  got  to  get  it  in  check  soon. 

Senator  NuNN.  How  about  in  Los  Angeles,  Mr.  Pollard,  the  same 
question — how  does  this  compare  relative  to  other  organized  crimi- 
nal activities  including  LCN,  but  also  including  organizations  like 
the  Crips  and  the  Bloods  that  we  have  had  hearings  on  before 
here? 

Mr.  Pollard.  Yes,  Senator.  First  of  all,  addressing  the  Crips  and 
Bloods  and  some  of  the  others,  that  is  a  major  problem  that  we 
probably  have  more  violence  from  than  most  of  the  rest  of  the 
groups  put  together  in  terms  of  drive-by  shootings  and  that  type 
of  activity. 

That  is  being  addressed  by  several  different  divisions  and  groups 
within  my  department.  In  terms  of  other  ethnic  groups,  there  are 
several  around,  none  of  which  seem  to  have  the  potential  at  this 
point  that  I  can  see  that  the  Russians  do — and  I  use  that  term 
"Russian"  including  Armenians  in  this  sense. 

Senator  NuNN.  Right. 

Mr.  Pollard.  The  LCN  in  Los  Angeles  has  never  been  as  strong 
as  the  East  Coast  LCN.  In  fact,  they  have  terms  for  themselves 
that  include  "Mickey  Mouse  Mafia"  and  things  like  that,  that  show 
that 

Senator  NuNN.  "Mickey  Mouse"  what? 

Mr.  Pollard.  They  refer  to  themselves  even  as  the  "Mickey 
Mouse  Mafia"  on  the  West  Coast,  and  they  do  not  seem  to  have  the 
strength  of  any  of  the  families  from  the  East  Coast.  East  Coast 
families  come  out  and  set  up  businesses  and  do  not  even  contact 
them  for  approval  or  to  pay  tribute. 

So  the  LCN  is  not  that  strong  of  an  issue  in  the  Los  Angeles 
area.  I  personally  believe — and  it  is  probably  because  I  am  working 
the  Russians — that  the  Russians  have  a  little  more  power  right 
now  and  are  going  to  be  a  lot  more  powerful  as  things  progress. 

Senator  NuNN.  Could  I  ask  our  undercover  police  officer  the 
same  question?  In  general,  comparing  this  group  that  we  have 
called  for  the  purposes  of  this  hearing  "Russian  organized  crime" 
to  other  organized  criminal  activities  in  the  area  of  your  expertise? 

Anonymous  Witness.  Senator,  I  consider  myself  an  export  on 
Russian  organized  crime.  I  am  not  familiar  with  the  other — or,  I 
was  not  involved  in  the  other  criminal  organization  investigations. 
So  I  would  have  to  accept  the  opinion  of  my  comrade  from  New 
York  as  well  as  my  colleagues  from  other  cities. 

Senator  NuNN.  You  are  accepting  him  as  a  comrade,  right? 

Anonymous  Witness.  Yes,  Senator. 

Senator  NUNN.  OK.  I  would  like  to  ask  our  witnesses  from  New 
York  and  L.A.  this  question.  You  have  heard  the  undercover  wit- 
ness here  basically  say  that  he  would  have  to  advise  someone  who 


71 

was  being  extorted  in  this  situation  to  cooperate  rather  than  to  go 
to  the  police  officials.  Would  that  be,  in  your  area,  also  your  view, 
or  do  you  have  a  different  position? 

Mr.  Cefarello.  I  believe  that  at  this  time,  I  would  probably 
have  to  tell  somebody  the  same  thing  that  he  is  saying.  It  is  prob- 
ably a  lot  safer  right  now  to  just  pay  the  money. 

However,  as  a  law  enforcement  officer,  I  do  not  want  to  do  some- 
thing like  that.  What  I  would  suggest  is  that  we  find  a  way  to  pro- 
tect this  person's  family  here  and  in  the  former  Soviet  Union. 

Senator  NUNN.  You  are  saying  you  need  a  lot  better  protection 
for  people  who  come  to  the  law  enforcement  officials  with  those 
kinds  of  complaints  than  we  have  now. 

Mr.  Cefarello.  Right.  Right  now,  we  have  the  witness  protec- 
tion program.  That  helps  for  the  person  who  is  talking  here.  What 
about  his  wife  or  his  child  or  his  mother  and  father  in  Russia, 
whom  we  cannot  protect  at  this  time  and  are  vulnerable? 

Senator  NuNN.  Do  you  concur  in  that,  Mr.  Mackey? 

Mr.  Mackey.  I  disagree,  Senator  Nunn,  only  because  I  would 
probably  get  my  head  lopped  off  if  I  went  back  and  stated  anything 
to  the  contrary.  Any  complainant  who  walks  into  a  New  York  City 
police  precinct,  we  certainly  have  to  entertain  and  accept  every 
complaint  that  is  given  to  us,  and  we  would  certainly  advise  any 
complainant  coming  in  who  was  the  victim  of  an  attempted  extor- 
tion or  an  extortion  that  we  are  there,  willing  and  able  to  provide 
the  assistance  and  conduct  the  investigation  to  possibly  arrest  and 
then  probably  prosecute  these  people — although,  as  stated  earlier, 
it  is  very,  very  difficult  to  get  past  the  arrest  stage  with  these  peo- 
ple. A  lot  of  them  are  very,  very  happy  in  the  NYPD  vernacular 
to  "take  the  collar,"  and  then  once  the  "collar"  is  over,  never  show 
up  for  grand  jury  proceedings  or  any  further  prosecution. 

Senator  Nunn.  Mr.  Pollard,  could  I  ask  you  to  answer  the  same 
question — extortion  and  your  advice  in  L.A.  to  potential  or  actual 
victims? 

Mr.  Pollard.  Yes,  Senator.  In  Los  Angeles,  I  try  to  get  every  vic- 
tim I  can  who  is  reporting  an  extortion  to  actively  go  along  with 
our  investigation. 

The  biggest  problem  we  have  after  that  point  is  with  the  prosecu- 
tors. We  are  having  to  educate  individual  prosecutors  as  we  go  with 
particular  cases,  and  this  is  a  problem  because  in  large  cities,  the 
prosecutors  have  a  filing  policy  that  unless  it  meets  a  certain  level, 
they  are  not  going  to  prosecute  the  case.  A  lot  of  our  cases  fall 
below  that  level. 

We  need  to  prosecute  every  case  we  can,  and  that  does  two 
things.  It  sends  a  message  to  the  criminals  that  our  system  is  not 
going  to  allow  their  activities,  but  it  also  sends  a  message  to  the 
Russian-speaking  community  that  we  are  there,  and  we  can  help 
them.  And  without  getting  into  that  community,  we  are  never 
going  to  have  them  come  forward  again. 

Senator  Nunn.  Thank  you,  Mr.  Pollard.  You  are  the  "anonymous 
witness"  as  far  as  I  am  concerned,  since  I  cannot  see  you,  but  we 
appreciate  you  being  here. 

Mr.  Cefarello,  Mr.  Mackey,  and  our  undercover  police  officer,  we 
thank  all  of  you  for  being  here,  and  Senator  Roth,  to  you  and  your 
staff,  thank  you  for  having  the  focus  on  this.  I  think  it  is  a  very 


72 

important  subject,  and  I  congratulate  you  for  the  hearing  and  the 
focus. 

Senator  RoTH.  Thank  you,  Senator  Nunn. 

I  want  to  thank  each  of  you  gentlemen  for  being  here.  I  think 
your  testimony  has  been  most  helpful. 

For  the  final  time,  I  will  ask  that  the  Capitol  Police  secure  the 
hearing  room,  ensure  that  all  spectators  remain  seated,  and  that 
no  one  be  allowed  to  enter  or  leave  the  hearing  room  during  this 
witness'  exit. 

Prior  to  the  exit  of  this  witness,  I  direct  that  all  cameras  be 
turned  to  face  either  to  the  rear  or  to  the  window  side  of  the  hear- 
ing room.  I  understand  the  cameras  have  all  been  turned,  and  I 
would  ask  that  the  witness  now  leave  the  hearing  room.  Again,  I 
want  to  thank  each  of  you.  We  do  not  want  any  of  your  heads 
lopped  off. 

The  Subcommittee  is  in  recess. 

[Whereupon,  at  1:50  p.m.,  the  Subcommittee  was  adjourned.] 


APPENDIX 


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ATTACHMENT  111 


U.S.    Customs    Assistance    to    Former    Soviet    Union 

and 
Central    and   Eastern    Europe 


hi:.,- 

l-nplementat  ion 

1  of  Oj>-  = 
of  the 
Actions 

Ti-p^  of 

Pj:-.  .cpjnt 
lev-. 

Statu: 

Subjoct- 
Obiect 1 v-s 

1 

-  .  :  ..snop 

r:^r^" 

fo.Tplete 
1996 

.'r.eitiqation 
of  smuggling 
i:    stolen 
vehicles  and 
isset  jhacing 

i 

Workshop 

35  .  -  irs, 
T.ana^e.-s 

Complete 
1996 

Investigation 
of  smuggling 
of  stolen 
vehicles  ind 
asset  sharing 

,..i.r. 

:  196 

i 

Workshop 

;3  -oc^ecj. 

Co««ilete 
1996 

Investigatlcn 
of  smuggling 
of  stolen 
vehicles  and 
asset  Sharing 

e  g  .  technical  assistance,  seminar,  course,  train-the  trainers,  equipment 


Senate  Permanent  Su&coffliTlitteo 
on  lnvestiptMU>s 


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SOLNTSEVSKAYA  ORGANIZATION 

-  Sergfei  Mikhailov 

-  Viktor  Averin 

LUDWIG  FAINBERG  ORGANIZATION 

-  Ludwig  Fainberg 

MONYA  ELSON  ORGANIZATION 

-  Mooya  Elson 


MOGILEViCH  ORGANIZATION 
-  Semion  Mogielvich 


KIKALICHVlLi  ORGANIZATfON 

-  Anzor  Kikalichvili  ,^ 

-  losifKobzon  9 


lECHEN  ORGANIZATION 
-  Ruslan  Labazanov 


FANCHINI  ORGANIZATION 
-  Riccardo  Fanchini 


LYUBERETSKAYA  ORGANIZATION 
-  Vadim  Voronin 


KAZANSKAYA  ORGANIZATION 
-  Unidentified 


DAGESTANTSY  ORGANIZATION 
-  Unidentified 


BRANDWAIN  ORGANIZATION „:^ 
-  Rachmiel  Brandwain         M 


MAZUTKINSKAYA  ORGANIZATION 
-  Alexei  Petrov 


BORIS  SORKIN  ORGANIZATION  j 
*-  -  Boris  Sorkin 


BAKLANOV  ORGANIZATION 

-  Boris  Lungin 

-  Lev  Andelman 


RUDYAK  ORGANIZATION 
-  Mikhail  Rudyak 


87 


BRUK  ORGANIZATION 
-  Mikhail  Bruk 


SOGOMONIAN  ORGANIZATION 
-  Levon  Sogomonian 


IBRAGIMOV  ORGANIZATION 
.    -  Nikolay  Ibragimov 


ARAKELIAN  ORGANIZATION 
-  Vrej  Arakelian 


ITAEV  ORGANIZATION 
-  Meir  Itaev 


BLIKIAN  ORGANIZATION 
-  Nishan  Blikian 


.ERGEY  EFROS  ORGANIZATION 
-  Sergey  Efros 


SOGOMONYAN  ORGANIZATION 
-  George  Sogomonyan 


VILNIUS  BRIGADE  ^ 

-  Georgi  Dekadnize 


VORKUTA  ORGANIZATION 
-  Viktor  Panchuk 


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««:on:,Tiitte3 


'^^'M  #__/^ 


INTERNAL  REVENUE  SERVICE  CRIMINAL  INVESTIGATION 

MOTOR  Fuel  Tax  Fraud  Indictments 


DATE 


LOCATION 


PERSONS 

Indicted 


ESTIMATED 

TAX  LOSS 

($  MILLIONS) 


03/29/93 

PHILADEPHIA 

15 

$14.8 

04/06/93 

COLORADO 
NEBRASKA 
WYOMING 

2 

4.6 

05/05/93 

NEWARK 

13 

60.0 

05/27/93 

BROOKLYN 

18 

34. 0 

06/30/93 

BROOKLYN 

8 

85. 0 

09/02/93 

HOUSTON 

4 

3.0 

01/07/94 

ATLANTA 

9 

1  .3 

1  0/27/93 

PITTSBURGH 

19 

21  .O 

1  2/03/93 

02/24/94 

08/08/95 

NEWARK 

25 

140.0 

09/ 12/95 

LOS  ANGELES 

23 

N/A 

1 

TOTALS 

136 

$363. 70               i 

92 


CITY  OF 


1 

Glendale 


CALIFORNIA  '"•'"• 


POUCE 
DEPARTMENT 


140  North  Isabel  St.,  Glendale.  CA  91206-4382  •  (818)548- 


May  10, 1996 


United  States  Senate 

Permanent  Subcommittiee  on  Investigations 
Senator  William  V.  Roth,  Jr.,  Chairman 
Senator  Sam  Nunn,  Minority  Member 

Attn:  Michael  Bopp 

Subcommittee  Counsel 


Dear  Senators: 

The  City  of  Glendale,  California  Police  Department  regrets  that  it 
cannot  make  available  a  law  enforcement  representative  to  personally 
testify  before  the  subcommittee  as  we  had  originally  planned.  But  we 
do  hope  that  our  voice  can  still  be  heard  by  submitting  this  document 
so  that  it  may  be  introduced  into  the  subcommittee  record  as  to  our 
efforts  in  attempting  to  thwart  the  Armenian  and  Russian  Armenian 
organized  crime  problem. 

Historically,  Glendale  has  been  a  homogenous  community  made  up 
predominantly  of  Caucasian  population.  The  city  for  years  was 
considered  a  middle  to  upper  middle  class  conservative  neighborhood. 
However,  approximately  twenty-five  years  ago  the  demographics  of  the 
city  began  to  change  and  Glendale  became  a  heterogeneous 
community.  The  influx  of  the  Armenian  population  to  the  Glendale 
area,  specifically  Russian  Armenian,  is  attributed  to  two  waves  of 
migration.  In  the  early  I980's,  we  saw  the  first  wave  of  migration  of  the 
Russian  Armenians  to  the  Glendale  and  adjoining  cities.  Then,  in 
1991,  after  the  fall  of  the  "Iron  Curtain",  the  City  of  Glendale 
experienced  a  drastic  population  increase  within  the  Russian 
Armenian  communities.  Currently,  the  city's  population  is  estimated 
at  200,000,  of  which  is  roughly  25%  Armenian.  It  is  estimated  that 
approximately  50%  of  the  city's  Armenian  population  is  Russian 
Armenian. 

To  meet  the  demands  of  the  cultural  diversity  of  the  city,  the  police 
department  began  an  aggressive  recruiting  effort  to  balance  its  work 
force  to  meet  the  demands  of  the  community.   At  present,  the  Glendale 


Police  Department  employs  223  sworn  personnel,  and  upwards  of  10 


Ti-c. 


93 


civilian  employees.  Of  these  employees,  we  have  (4)  full  time  Armenian  police 
officers  and  (6)  civilian  Armenian  employees.  This  translates  into  roughly  3.5%  of 
the  work  force  having  an  Armenian  background.  In  addition,  the  Glendale  Police 
Department  has  (4)  reserve  police  officers  of  Armenian  descent,  and  upon  successful 
completion  of  the  police  academy,  we  will  soon  be  adding  a  Russian  speaking  officer 
to  full  time  status. 

In  1994,  the  management  of  the  Glendale  Police  Department  realized  there 
was  significant  Russian  Armenian  organized  crime  developing  within  the  city  as 
well  as  throughout  the  region  of  Los  Angeles  County.  As  a  result,  the  Glendale 
Police  Department  expanded  its  criminal  intelligence  unit  to  also  include  an 
organized  crime  unit.  With  limited  manpower  and  resources,  the  department 
allocated  a  sergeant  and  three  officers  to  address  the  organized  crime  issues  of  the 
Russian  Armenian  communities  not  only  in  Glendale,  but  throughout  the  region. 

At  present,  our  criminal  intelligence  and  organized  crime  unit  investigates 
and  gathers  information  on  crimes  against  persons,  crimes  against  property,  fraud 
related  crime  and  narcotic  offenses.  Of  these,  our  unit  along  with  the  assistance  of 
other  units  of  the  department,  investigate  murders,  extortions,  robberies,  felonious 
assaults,  arsons.  Financial  crimes  including,  money  laundering,  check  kiting, 
counterfeit  check  production,  auto  insurance/medical  insurance  fraud,  electronic 
fraud  (credit  card  fraud  and  cellular  phone  fraud).  Additionally  Glendale  has  always 
been  aggressively  involved  with  enforcing  narcotic  smuggling  and  distribution. 

The  following  is  a  synopsis  of  three  investigations  which  directly  involve  Russian 
Armenian  organized  crime  elements  in  the  Glendale  and  surrounding  areas. 

1)  Murders  with  in  the  garment  district: 

-A  multi-agency  cooperative  effort  has  been  established  to  investigate  the 
recent  rash  of  violent  murders  and  attempted  murders  associated  with  the  garment 
district,  which  are  primarily  Russian-Armenian  owned  businesses.  Intelligence 
gathering  revealed  a  major  clothing  line  had  sub-contracted  out  to  several  sweat- 
shops to  reduce  production  costs  in  the  Los  Angeles  and  Glendale  areas.  As  a  result, 
stiff  competition  came  about  as  sub-contractors  attempted  to  underbid  in  order  to 
obtain  the  production  contract.  In  some  instances,  there  were  bribes  and  "kick 
backs"  to  company  management  in  order  to  leave  a  contract  with  a  certain  sub- 
contractor. Sub-contractors  became  disgruntled  and  the  garment  district  wars  began. 
To  date,  there  have  been  five  murders,  five  attempted  murders,  shootings, 
bombings  and  extortions  committed  within  the  garment  district.  All  of  these 
incidents  are  believed  to  be  organized  crime  related  since  due  to  clear  indications 
that  sub-contractors  were  tied  very  closely  to  organized  crime  figures  and  known 
hit-men.  As  a  result  of  these  crimes,  there  has  been  one  conviction  for  murder. 

2)  Extortions: 

-  This  agency  conducted  an  extortion  investigation  where  an  individual,  Hagop 
Kerboyan  was  extorting  money  from  a  Glendale  chiropractic  doctor.  Threats  were 
made  to  force  the  doctor  to  pay  a  substantial  amount  of  money  in  lieu  of  physical 


25-049  0-96-4 


94 


injury.  It  was  later  determined  the  doctor  was  committing  insurance  fraud  on  the 
State  of  California  for  large  sums  of  money.  Kerboyan,  having  knowledge  of  this 
extorted  the  doctor,  believing  because  he  was  conducting  a  fraudulent  business, 
would  not  report  the  extortion.  Ultimately  Kerboyan  was  convicted  and  the  doctor 
was  indicted.  Our  investigation  has  also  revealed  that  Kerboyan  belongs  to  a 
organized  crime  cell  in  the  Glendale  area. 

Investigating  these  types  of  cases  indicates  that  although  up  until  now,  the 
Russian  Armenian  criminals  were  not  structured  as  traditional  Italian  organized 
crime,  but  they  are  becoming  increasingly  structured  and  disciplined.  It  is  evident 
that  there  are  cells  of  loosely  structured  groups  which  contain  anjrwhere  from  ten  to 
one  hundred  individuals.  These  groups  have  agreed  to  divide  the  Los  Angeles 
region  into  territories  which  are  controlled  by  their  respective  criminal  groups. 
These  groups  extort  "territory  taxes"  from  the  businesses  within  their  specific  area. 
If  businesses  refuse  to  pay,  they  usually  are  threatened  often  resulting  in  murder. 
Their  family  members  are  also  threatened  in  order  to  send  a  message.  In  some  cases, 
family  members  are  threatened  who  live  in  their  former  homeland  (usually 
Armenia)  if  they  do  not  cooperate.  Due  to  the  threatened  violence,  the  victims  are 
forced  to  pay  the  extortionists,  and  thus  the  crimes  go  unreported.  These  criminal 
groups  have  become  increasingly  educated  in  their  criminal  activities  in  that  they 
are  now  targeting  victims  that  are  medical  professionals  and  lawyers  who 
themselves  are  engaged  in  medical  insurance  fraud  or  auto  insurance  fraud,  (staged 
auto  collisions).  The  extortion  groups  know  that  this  group  of  individuals  are  less 
likely  to  report  the  extortions  to  law  enforcement  due  to  their  own  involvement  in 
criminal  activity  and  the  large  financial  return.  Often  times  the  results  of  these 
extortions  are  shootings,  stabbings,  and  murder. 

3)    White  collar  crime  and  electronic  fraud: 

-These  crimes  include  check  counterfeiting  and  kiting,  money  laundering, 
cellular  phone  fraud,  and  credit  card  fraud.  Of  particular  interest  is  a  case  in  which  a 
Russian  Armenian  had  been  cloning  cellular  phones  for  over  three  years.  He  had 
been  arrested  for  a  previous  cellular  phone  fraud  offense  and  was  on  probation 
when  our  investigation  began.  Through  our  investigations,  we  learned  that  the 
subject  of  our  investigation  was  cloning  the  cellular  phones  of  the  "Joe  Mikaelyan" 
crime  group.  This  crime  group  was  recently  dismantled  by  a  joint  task  force  which 
was  made  up  of  the  Federal  Bureau  of  Investigation,  the  Internal  Revenue  Service, 
Long  Beach  Police  Department,  Los  Angeles  Police  Department  and  the  California 
Department  of  Justice.  Joe  Mikaelyan,  a  self-professed  Armenian  Mafia  Godfather, 
and  his  crime  group  were  responsible  for  financial  losses  that  reached  multi-million 
dollar  figures  as  it  related  to  tax  evasion,  cellular  phone  cloning  and  fraud  related 
crimes.  Our  investigation  revealed  that  Joe  Mikaelyan  routinely  telephoned  and 
received  calls  from  top-level  Russian  crime  figures  located  on  the  east  coast.  The 
suspect  in  our  cellular  phone  cloning  operation  had  been  under  investigation  by  the 
cellular  phone  industry  for  several  years.  The  cellular  phone  industry  estimates 
that  in  North  America,  more  than  $600,000,000  annually  are  lost  in  revenue  due  to 
cellular  phone  cloning  and  related  expenses  for  investigations  into  their  losses.  The 
leading  states  for  cellular  phone  fraud  are  New  York,  Florida,  and  California.    The 


95 


cellular  phone  industry  believes  the  Russian  Armenians  to  not  only  be  the 
"Gcdfathers"  of  cellular  phone  fraud,  but  also  the  leaders  in  cellular  phone  cloning, 
and  responsible  for  the  vast  majority  of  their  losses.  The  cellular  phone  industries 
representatives  further  explained  that  no  other  criminal  group  has  dominated  the 
illegal  cellular  phone  cloning  operations  the  way  the  Russian  Armenian 
community  has.  While  investigating  a  cellular  phone  cloning  suspect,  we  learned 
that  in  a  one  month  period  he  was  responsible  for  a  loss  in  excess  of  $140,000  to  the 
cellular  phone  companies.  This  translates  into  an  annual  loss  of  over  1.6  million 
dollars. 

Recently,  the  Glendale  Police  organized  crime  unit  investigated  two  Russian 
Armenian  brothers  who  had  developed  a  process  to  defraud  not  only  the  cellular 
phone  companies,  but  also  long  distance  telephone  carriers  such  as  ATT  and  MCI. 
The  two  suspects  had  printed  business  cards  advertising  24  hour  service  for  long 
distance  calling  to  countries  around  the  world.  The  business  cards  were  printed  in 
Russian  and  Armenian  languages,  thereby  operating  under  a  comfort  zone  and 
screening  customers.  The  two  suspects  had  set  up  a  bank  of  three  pairs  of  cloned 
cellular  phones,  having  phones  linked  to  each  other.  In  order  to  speak  to  friends 
and  relatives  overseas,  particularly  in  Russia  and  Armenia,  the  customer  phoned 
the  beeper  number  on  the  business  card.  Once  the  call  was  completed,  the  suspect 
would  send  a  "runner"  to  the  customer's  residence  to  collect  the  money  for  the 
phone  call.  Although  these  crimes  may  seem  to  be  less  significant  in  the  realm  of 
more  serious  and  violent  crimes,  they  are  an  indication  as  to  how  complex  some 
investigations  can  be  when  dealing  with  fraudulent  crime. 

Compared  to  traditional  organized  crime,  we  have  learned  that  the  criminals 
we  investigate  tend  to  be  more  opportunistic  then  organized.  An  accurate 
description  of  these  groups  is  loosely  structured  organized  cells  of  criminal  groups. 
However,  this  does  not  diminish  the  organized  and  violent  manner  in  which  they 
commit  their  crimes.  It  is  our  opinion,  that  we  are  witnessing  the  precursors  to  the 
traditional  organized  crime  "family"  structures  with  bosses,  captains,  lieutenants, 
and  field  soldiers.  If  this  does  occur,  prosecution  of  top  level  figures  would  be 
difficult. 

The  following  factors  make  it  difficult  for  law  enforcement  to  attack  the 
Russia /Russian  Armenian  organized  crime  problems  within  the  Los  Angeles  and 
Glendale  regions: 

-the  lack  of  Russian  or  Armenian  speaking  investigators; 

-the  language  barriers  under  which  these  criminals  operate,  which 

has  become  their  comfort  zone; 

-the  ability  for  Russian  criminals  to  operate  so  well  in  a  black 

market  setting,  due  their  past  ability  to  survive  in  a   communist    economy    in 

their  homelands; 

-their  lack  of  fear  or  respect  for  the  American  Judicial  System 

because  of  their  knowledge  of  the  leniency  of  the  courts  due  to 

overcrowding  of  jails  and  prisons; 

-their  propensity  towards  violence  due  to  their  background  and  upbringing; 


96 


-the   ability    for   Russian    or    Armenian    foreigners    to   enter   tlie    country 

illegally  or  with  "tourist"  visas  to  commit  a  specific  crime,  which  often   times 

means  an  extortion  or  gangland   murder.     Soon  after  they  commit  their 

crimes,  they  flee  the  country  only  to  return  some  years  later  with  different 

identities; 

-the    sophisticated    manner    in    which    criminal    activity    is    carried    out 

within  the  Russian  and  Russian  Armenian  criminal  groups.    This  again    can 

be  directly  attributable  to  the  fact  that  they  come  from  a  system  where  criminal 

activity  is  common  place; 

-the    educational    and    training    background    of    these    organized    crime 

members,   some  of  whom  have  been  former  KGB  agents,        former  police 

officers,  politicians,  medical  professionals  and  such   back   in   their   countries. 

As  an  example,  several  years  ago  our  department  arrested  the  former      police 

chief  of  the  city  of  Yerevan,  Armenia's  capital,  for  an  investigation  into 

extortion,  rape,  and  kidnapping; 

-and    finally,    the   loose   structuring   of   these   criminal   groups   makes    it 

difficult  for  law  enforcement  to   track  criminal  activity    and       identify 

co-conspirators. 

In  conclusion,  it  is  our  opinion  that  crime  associated  with  the  Russian  and 
Russian  Armenian  communities  will  become  more  violent,  sophisticated,  and 
clandestine.  Law  enforcement  today  is  ill  equipped  to  effectively  investigate  the 
issues  of  Russian  organized  crime.  Although  addressing  the  issues  is  a  positive  step, 
law  enforcement  is  in  need  of  the  tools  to  apply  intelligence  information  to  actual 
investigations  and  subsequent  arrests.  This  includes  additional  manpower, 
equipment,  and  a  multi-agency  joint  task  force  comprised  of  federal,  state,  and  local 
resources.  Task  forces  are  effective  means  to  target  Russian  organized  crime  before 
establishing  an  irreversible  foothold  in  the  United  States,  as-  traditional  organized 
crime.  For  smaller  agencies,  it  is  difficult  to  allocate  significant  amounts  of 
resources  to  combat  Russian  organized  crime.  However,  if  the  resources  of  smaller 
agencies  are  combined  with  resources  of  larger  agencies,  the  results  will  be  far  more 
effective. 


Mark  W.  Distaso 

Commander 

Special  Investigations  Bureau 


Serjeant  ^rfatt  Wojnarowski 
Supervisor 
Intelligence/Organized  Crime  Unit 


Agent  Gerald  Uebel 
Lead  Invesitgator 
Intelligence/Organized  Crime  Unit 


97 


DEPARTMENT  OF  THE  TREASURY 

U.S.  CUSTOMS  SERVICE 


«"*;,/: 


liHiPin 


August    19,     1996 


Mr.  Stephen  Levin 

Senior  Counsel 

Senate  Coiiunittee  on  Governmental  Affairs 

Permanent  Subcommittee  on  Investigations 
SR-100  Russell  Senate  Office  Building 
Washington,  DC   20510 

Dear  Mr.  Levin: 

Attached  please  find  the  information  Chairman  Roth  and  Senator 
Cohen  requested  at  the  hearing  held  on  May  15,  1996,  concerning  the 
U.S.  Customs  Service  investigations  into  Russian  Organized  Crime. 
If  you  have  questions  or  need  additional  information,  please  do  not 
hesitate  to  contact  me. 


Gloria  Bryane 

Director 

Office  of  Congressional  Affairs 


Attachment 


98 


Chairman  Roth:   "First  Commissioner  Weise,  in  your  testimony,  you 
mentioned  that  the  Department  of  Defense  was  defrauded  by 
material  that  was  built  on  stolen  intellectual  property  and  was 
inadequate.   Could  you  tell  me  how  wide  or  how  broad  is  this  kind 
of  incidence?   Do  we  have  any  feeling  for  how  widespread  a 
practice  this  is?" 

Answer  for  the  record: 

The  Electrodyne  investigation  is  the  only  type  of  investigation, 
known  to  the  Customs  Service  where  the  U.S.  government  contracted 
out  to  individuals  who  then  subcontracted  out  to  Russian  and 
Ukrainian  military  contractors  to  produce  specific  electronic 
items  for  inclusion  in  our  national  defenses.   Then  these 
subjects  manufactured  the  products  to  substandard  specifications 
overseas  and  marked  them  as  made  in  America  prior  to  presenting 
the  items  to  the  Department  of  Defense. 


Senator  Cohen:   " on  the  first  chart  you  showed,  you  indicated 

that  there  were  6,000  grams  of  heroin  being  smuggled  in,  and  you 
said  that  14  people  have  been  convicted.   My  question  is  what  are 
the  sentences  given  out  to  those  14  individuals  who  were 
convicted?" 

Answer  for  the  record: 

attached 


99 

The  New  York  heroin  case  sentencing: 

1.    18  months  prison  then  deportation 

1.    30  months  prison  (humanitarian  reasons  -  subject  has 
terminal  illness) 

1.    121  months  prison 

60  months  supervised  release 

1.    121  months  prison 

60  months  supervised  release 
$5,000  fine 

1.    94  months.- prison 

60  months  supervised  release 

1.    12  months  prison 

60  months  supervised  release 
$5,000  fine 

1.    60  months  supervised  release 

1.    12  months  prison 

60  months  supervised  release 
400  hours  community  service 

1.    60  months  supervised  release 
$5,000  fine 

1.    10  months  prison  then  deportation 

1.    deportation  to  Israel 

1.    63  months  prison 

36  months  supervised  release 

1.    63  months  prison 

36  months  supervised  release 

other  defendant  not  sentenced  yet. 


100 


statement  of  George  J.  Weise,  Commissioner, 

D.S.  Customs  Service 

before  the  Senate  Committee  on  Governmental  Affairs 

Permanent  Subcommittee  on  Investigations 

May  15,  1996 

Good  morning,  Mr.  Chairman  and  Members  of  the  Committee.  It 
is  a  distinct  pleasure  to  appear  before  you  today  to  discuss 
Russian/Eurasian  organized  crime  in  the  United  States  and  the 
cooperative  efforts  between  the  U.S.  Customs  Service  and  the 
Forner  Soviet  Union  (FSU)  to  combat  this  growing  problem.   I 
would  like  to  describe  Customs'  unique  role  and  mission  in  this 
area  . 

One  of  the  most  critical  challenges  customs  administrations 
worldwide,  face  now,  and  in  the  future,  is  the  threat  posed  by 
Russian  organized  crime.   The  fall  of  the  Berlin  Wall  in  1989  and 
the  collapse  of  the  Soviet  Union  resulted  in  the  emergence  of  a 
new  threat  to  the  national  security  of  the  United  States  and  the 
world  community.   As  a  consequence  of  the  collapse  of  the  Soviet 
State,  a  vast  supermarket  of  nuclear  materials,  other  stockpiled 
weapons  of  mass  destruction  (WMD) ,  and  avenues  for  international 
money  laundering  through  various  criminal  schemes,  including  drug 
smuggling,  have  become  available.   In  response  to  this  ominous 
threat,  and  as  the  geopolitical  climate  changes,  U.S.  Customs  is 
refining  and  intensifying  its  existing  strategies  and  developing 
new  initiatives  to  deal  with  this  problem. 

Enhanced  law  enforcement  efforts  must  be  taken  now  to  guard 
against  nuclear  weapons  or  weapons-grade  material  falling  into 
the  hands  of  outlaw  nations,  organized  crime  groups,  or  terrorist 
bands  planning  to  carry  out  a  catastrophic  attack.   Further,  the 
United  States,  through  the  combined  efforts  of  the  law 
enforcement  community,  must  enhance  its  efforts  to  deter 
Russian/Eurasian  organized  crime  before  it  becomes  well- 
entrenched  in  the  United  States. 

Finally,  we  must  use  our  collective  law  enforcement  skills 
to  ensure  that  organized  crime  groups  do  not  thwart  the  ongoing 
democratic  process  in  Russia.   We  cannot  sit  idly  by  while 
organized  crime  groups  expand  their  operations.   Indeed,  as  I 
stated  at  the  outset,  a  breakdown  in  Russia's  civil  order  will 
present  grave  national  security  concerns  for  America. 

To  ensure  that  we  are  devoting  sufficient  resources  to 
address  the  expansion  of  operations  of  international  organized 
crime  groups  into  the  United  States,  we  must  increase  both  our 
foreign  liaison  efforts  and  maintain  our  investigative  emphasis 
on  international  criminal  organizations.   Second,  we  must 
continue  to  provide  training  programs  which  are  responsive  to  the 
legitimate  needs  of  foreign  law  enforcement  agencies,  thereby 


101 


enhancing  their  capabilities  to  meet  the  threats  of 

Russian/Eurasian  organized  crime  and  the  sale  and  diversion  of 
nuclear  materials.   Several  nations  have  already  asked  for  our 
assistance.   It  is  in  the  best  interests  of  the  world  community 
that  we  continue  these  initiatives  to  prevent  these  organized 

crime  groups  from  becoming  more  powerful  and  entrenched. 

From  a  U.S.  Customs  investigative  perspective,  the  main 
threats  posed  by  Former  Soviet  Union  (FSU)  criminal  groups,  both 
domestic  and  foreign,  continue  to  be,  narcotics  smuggling,  money 
laundering,  commercial  trade  fraud  and  the  smuggling/sale  of 
illicit  munitions  and  strategic  materials.   Another  threat  that 
has  emerged  in  the  last  few  years  is  the  increase  in  the  number 
of  cases  involving  the  smuggling  of  stolen  vehicles  from  the 
United  States  to  the  FSU. 

The  typical  Customs  investigation  does  not  necessarily 
target  the  totality  of  any  one  particular  organized  crime  group. 
Rather,  Customs'  unique  nature,  as  a  primary  border  enforcement 
agency,  and  the  multifaceted  and  diverse  set  of  laws  that  Customs 
enforces,  usually  results  in  investigative  and  enforcement 
activity  directed  at  specific  criminal  activities  of  organized 
crime  groups.   Often  the  net  result  of  these  investigations  is 
the  disruption  and  debilitation  of  major  organized  crime  groups 
with  subsequent  prosecution. 

Since  1991,  Customs'  investigations,  relating  to  Russian 
organized  crime,  both  open  and  closed,  total  approximately  82 
cases.   Customs  investigations  at  this  time  have  focused  on 
approximately  5-6  primary  organizations.   These  cases  range  in 
content  from  drug  smuggling  cases  to  money  laundering  to  export 
violations  and  commercial  fraud  activity.   In  addition.  Customs, 
working  with  other  law  enforcement  agencies,  maintains  an  active 
Russian  organized  crime  intelligence  program  which  has  documented 
over  2000  individuals  and  companies  associated  with  criminal 
activity. 

The  growth  of  Russian/Eurasian  organized  crime  groups  in  the 
United  States  continues  to  be  a  principal  concern  for  law 
enforcement.   Although  the  Russian  Federation  has  received  the 
majority  of  attention  and  press  regarding  the  increase  of 
organized  crime  activities,  the  other  14  new  republics  that  were 
once  part  of  the  Soviet  Union,  and  the  Warsaw  Bloc  countries  that 
were  controlled  by  the  Soviet  Union,  are  all  experiencing  a 
significant  rise  in  organized  crime  activities.   Though  now 
separated  by  country  borders,  many  of  these  organized  crime 
groups  in  the  new  republics  are  known  to  be  associated  with  each 
other  and  have  worked  together  in  the  past.   Russia,  the  largest 
country  in  geographic  area  and  population,  is  the  cornerstone  of 
stability  in  the  area.   The  criminal  groups  comprised  of  emigres 
from  the  FSU  function  as  an  integral  part  of  an  international 


102 


network  with  known  ties  to  the  Colombian  Cartels,  Italian  Mafia, 
Israeli  organized  crime,  and  other  international  organized  crime 
groups . 

Criminal  cells/networks  comprised  of  emigres  from  the  FSU 
operating  in  the  United  States  have  been  identified  by  many 
different  terms,  "Russian  Mafia,"  "Russian  Organized  Crime," 
"Organizatsiya , "  "Malina,"  "Mafiya,"  "Odessa  Mafia,"  and  "Soviet 
Criminal  Network."   According  to  various  sources,  some  of  the 
cells/networks  are  aligned  with  specific  leaders,  and  others  by 
ethnic  background,  or  a  particular  criminal  activity. 

The  true  organizational  structure  and  number  of 
Russian/Eurasian  organized  crim.e  groups  operating  in  the  United 
States  is  unknown  at  this  time.   Many  in  law  enforcement  believe 
that  the  groups  are  organized  along  ethnic, '  religious  or 
geographical  alliances.   However,  this  theory  is  not  etched  in 
stone,  as  some  groups  may  be  organized  strictly  for  profit. 

Based  upon  available  intelligence  sources  and  de-briefings 
of  knowledgeable  confidential  sources,  it  would  appear  that 
Russian  organized  criminal  groups  operating  in  the  United  States 
is  not  structured  in  the  same  manner  as  traditional  organized 
crime  syndicates,  i.e.  there  is  no  criminal  hierarchy  or  firm 
chain  of  command.   The  complexion  of  this  criminal  activity  will 
change  in  the  foreseeable  future  with  the  influx  into  the  United 
States  of  known  crime  figures  who  are  members  of  established 
crime  families  throughout  the  FSU. 

Russian  organized  crime  groups  are  also  using  the  services 
of  commercial  information  companies  in  an  attempt  to  gather 
information  on  government  and  law  enforcement  officials  involved 
in  the  investigation  of  Russian  organized  crime.   Clearly,  this 
poses  a  potential  threat  to  law  enforcement  officers,  since 
information  may  include  details  such  as  address  and  telephone 
numbers,  identities  of  family  members,  credit  card  information, 
vehicle  ownership,  etc. 

The  U.S.  Customs  Service,  as  a  protector  of  our  borders,  is 
the  first  line  of  defense  in  United  States  law  enforcement.   Our 
mission  will  be  seriously  challenged  by  the  narcotics  smuggling, 
money  laundering,  and  commercial  fraud  threats,  as  well  as  the 
smuggling/sale  of  munitions  and  strategic  materials.   Throughout 
the  United  States,  informal  task  forces  have  been  established  by 
Customs,  to  investigate  specific  FSU  emigre  criminal  cases.   The 
preferable  way  to  deal  with  this  issue,  in  the  areas  of  concern 
to  the  United  States,  would  be  through  the  coordinated  exchange 
of  information,  better  intelligence  collection  and  by 
strengthening  cooperation  between  law  enforcement  agencies.   Law 
enforcement  should  target  individuals  and  companies,  and 
investigate  crimes  committed  by  FSU  emigre  criminal  groups, 
utilizing  laws  that  have  been  used  successfully  against  other 


103 


groups  such  as  the  traditional  Mafia,  Cartels  and  other  high 
profile  criminal  organizations. 

FSD  LAW  EN70RCEMEKT 
COOPERATION/ ASSISTANCE 

Customs  Mutual  Assistance  Agreements 

The  United  States  currently  has  Customs  Mutual  Assistance 
Agreements  (CMAA's)  with  26  nations.   These  are  Executive 
Agreements  negotiated  with  other  nations  considered  to  be 
critical  for  customs  law  enforcement  cooperation.   These 
agreements  deal  with  the  exchange  of  information  and  the 
enforcement  of  prohibitions,  restrictions,  or  controls.   CMAA's 
provide  a  basis  for  sharing  information  and  coordinating 
operations  in  all  areas  of  enforcement. 

In  the  former  Soviet  Union,  we  currently  have  agreements 
with  Russia  (1993),  Belarus  (1994),  and  U)craine  (1994).   We  are 
currently  in  the  process  of  negotiating  agreements  with  Kaza)cstan 
and  Kyrgyzstan.   We  also  have  agreements  with  almost  all  of  the 
European  Union  states,  as  well  as,  Poland,  Hungary,  the  Czech 
Republic,  Finland  and  Sweden. 

Customs  Attache  in  Moscow 

In  an  effort  to  capitalize  on  the  growing  working 
relationship  between  the  U.S.  and  the  Russian  Federation,  Customs 
has  received  approval  to  permanently  place  one  agent  in  Moscow  to 
work  closely  with  Russian  Customs  and  law  enforcement  officials. 
The  position  has  been  filled  with  a  qualified  Russian  speaking 
agent.   Prior  to  this  position  being  filled,  a  Customs  agent  was 
temporarily  assigned  to  Moscow  for  the  past  several  months,  while 
our  Customs  Attache  in  Bonn  continued  to  assist  with 
investigations  in  Russia,  Ukraine  and  some  of  the  other  Newly 
Independent  States  (NIS) .   The  results  thus  far  are  impressive. 
The  cooperation  we  have  received  from  Russian  Customs  and  the 
Russian  Federal  Police  has  been  outstanding. 

U.S.  Customs  has  had  contact  with  its  direct  counterparts  in 
the  former  Soviet  Union  and  the  Russian  Federation  for  over 
20  years.   Even  under  the  Soviet  system,  relations  were 
cordial  and  a  Customs  Mutual  Assistance  Agreement (CMAA)  was 
concluded.   Since  1992,  relations  with  the  State  Customs 
Committee  of  the  Russian  Federation  have  been  greatly  expanded 
and  intensified.   A  new  CMAA  was  concluded  in  1994  and  signed 
during  a  summit  meeting  between  Presidents  Clinton  and  Yeltsin  in 
September  of  that  year.   The  Director  General  of  Russian  Customs, 
his  senior  staff  and  the  12  directors  of  their  regional  customs 
administrations  have  all  visited  the  United  States  and  several 
reciprocal  visits  have  occurred  or  are  being  planned.   Russian 
Customs  sent  representatives  to  our  seminar  on  Nuclear  Smuggling 


104 


in  September  1995,  and  they  also  sent  representatives  to  a  U.S.- 
Russian Preventive  Enforcement  Technical  Workshop  in  March  of 
this  year. 

At  the  working  level,  Russian  Customs  routinely  shares 
information  and  requests  investigative  assistance  through  our 
Customs  Attache  office  in  Bonn,  Germany.   The  assistance  of 
Russian  Customs  in  Moscow  has  enabled  us  to  expand  our  level  and 
breadth  of  contacts  in  Moscow  to  the  Procurator  General,  other 
law  enforcement  agencies  and  the  Interior  Ministry  in  Russia 
(MVD) .   In  general,  U.S.  Customs  jurisdiction  is  similar  to  that 
of  our  Russian  colleagues,  but  our  investigative  authority  is 
much  greater.   Russian  Customs  efforts  at  establishing  an 
investigative  or  "enforcement"  component  are  underway,  but  at  a 
nascent  stage  of  development.   The  most  recent  visit  of  Russian 
officers  to  the  U.S.  involved  three  senior  officials  responsible 
for  providing  security  at  border  posts,  investigating  smuggling 
between  the  ports  of  entry  and  responding  to  threats  against 
customs  employees  and  facilities. 

The  Russian  Customs  Service  has  experienced  phenomenal, 
recent  growth.   While  it  was  a  force  of  only  6,000  officers  in 
1991,  it  may  comprise  as  many  as  40,000  by  the  end  of  1996. 
Our  working  relationship  is  expected  to  grow  significantly  with 
the  opening  of  an  office  in  Moscow  later  this  year,  and,  we 
believe,  that  Russian  Customs  involvement  in  our  non- 
proliferation  interdictions  and  investigations  will  be  productive 
in  the  near  future.   Both  sides  view  such  work  as  a  significant 
national  priority.  _ 

Training  Initiatives 

Our  international  training  efforts  stem  largely  from  our 
role  as  the  lead  U.S.  law  enforcement  agency  for  investigations 
and  border  interdiction  in  the  area  of  drug  smuggling, 
international  money  laundering,  trade  violations,  and  export 
controls.   U.S.  Customs  coordinates  its  training  in  the  FSU  and 
Eastern  Europe  through  the  Department  of  State  Interagency 
Working  Group  (IWG) .   U.S.  Customs  has  been  conducting  training 
and  technical  assistance  in  these  areas  since  the  early  1980's. 
For  instance  in  the  area  of  export  controls  we  have  provided  this 
type  of  training  to  at  least  35  countries  on  four  continents  and 
to  more  than  1,000  customs  and  police  officers.   Most  of  our 
training  efforts  relate  to  drug  smuggling,  international  money 
laundering,  trade  violations,  strategic  violations,  and 
international  stolen  vehicles. 

Our  most  recent  training  was  the  U.S. /Russia  Preventive 
Enforcement  Technical  Workshop.   This  program  built  a  basis  for 
future  export  enforcement  cooperation  by  familiarizing  Russian 
export  enforcement  managers  with  the  United  States  Government's 
preventive  enforcement  programs,  measures,  &nd  methods.   It 


I 


105 


focused  on  the  challenges  and  needs  of  effective  export 
enforcement,  in  regards  to  organized  criminal  enterprises.   We 
discussed  techniques  and  regulations  and  laws  used  by  U.S. 
government  agencies  to  meet  export  enforcement  needs  and  the  role 
of  interagency  and  international  cooperation  in  detecting  and 
interdicting  illegal  exports.   The  training  included  discussions 
in  Washington,  D.C.  and  visits  to  export  enforcement  field 
operation  sites  in  Ft.  Lauderdale  and  Miami,  Florida.   The 
Russian  attendees  spent  two  days  observing  actual  enforcement 
operations  at  the  different  field  offices  of  the  Department  of 
Commerce's  Bureau  of  Export  Enforcement,  the  U.S.  Customs  Service 
and  the  U.S.  Attorney.   The  training  featured  presentations  and 
discussions  by  the  U.S.  Customs  Service,  Commerce's  Export 
Enforcement,  Export  Administration,  Treasury  Office  of  General 
Counsel,  the  Federal  Bureau  of  Investigation,  and  the  Departments 
of  State,  Treasury,  Energy  and  Defense  on  each  of  their 
contributions  to  export  control.   The  participants  then  discussed 
the  next  steps  needed  to  develop  cooperative  preventive 
enforcement  to  combat  organized  crime. 

Historically,  Russian,  and  the  former  Soviet  Customs,  relied 
heavily  on  academic  training  for  all  new  employees.   New  trainees 
were  expected  to  attend  their  Customs  Academy  for  two  to  four 
years  before  actually  beginning  their  jobs,  taking  such  courses 
as  customs  laws  and  regulations,  and  financial  management. 
Today,  with  the  massive  hiring  program  undertaken  by  Russian 
Customs,  this  type  of  long  term  training  does  not  meet  their 
needs.   For  this  reason,  we  have  been  trying  to  assist  them  in 
developing  shorter  more  flexible  training  programs  that  can  be 
given  at  field  locations  and  stressing  the  use  of  practical 
exercises.   Last  September,  U.S.  Customs  conducted  a  Train-the- 
Trainer  program  in  St.  Petersburg,  Russia.   The  overall  objective 
of  this  program  was  to  further  develop  Russian  Customs  training 
infrastructure  by  increasing  the  number  of  qualified  training 
instructors.   This  specific  course  focused  on  training  related  to 
border  interdiction.   As  I  speak,  another  Cpstoms  training  team 
is  preparing  to  travel  to  Moscow  this  weekend  to  conduct  a 
similar  Train-the-Trainer  course.   A  third  Train-the-Trainer 
course  has  been  planned  to  be  delivered  in  Vladivostok  later  this 
year. 

AREAS  0?  INVESTIGATIVE  CONCERN 
NARCOTICS  SMUGGLING,  PRODUCTION  and  TRANSSHIPMENT 

The  Russian  Federation  and  many  of  the  other  new  republics 
have  experienced  a  dramatic  increase  in  drug  use  and  related 
crimes.  There  also  has  been  an  enormous  increase  in  the  amount  of 
poppies  cultivated  in  a  number  of  the  new  republics,  which  have 
also  become  transshipment  routes  for  narcotics  destined  for 
Western  Europe  and  the  United  States.   Intelligence  indicates 
that  FSU  organized  crime  groups  are  significantly  involved  in 
narcotics  trafficking.   Although  arrest  statistics  and  seizures 


106 


are  low  pertaining  to  FSU  emigres'  narcotics  smuggling 
activities,  past  experience  has  proven  that  this  group  has  the 
capability  to  adapt  to  any  illegal  act  that  generates  a  profit. 

Further,  based  upon  overseas  seizures,  intelligence, 
source  information  and  newspaper  articles,  the  FSU  (15  new 
republics)  and  East  Bloc  countries  have  become  a  major  sales 
market,  transshipment  route,  storage  area  and  production  source 
for  many  drugs  destined  for  Western  Europe  and  the  United  States. 
Heroin  from  the  Golden  Crescent  and  Golden  Triangle,  is 
transshipped  through  the  FSU  to  the  United  States.   In  August  of 
1995,  two  Polish  nationals  attempting  to  smuggle  100  kilograms  of 
heroin  into  Germany  were  arrested  by  German  Customs.   This  is  the 
largest  heroin  seizure  ever  made,  in  what  was  formerly  East 
Germany . 

Another  area  of  major  concern  is  the  vast  commercial/ 
military  shipping  fleet  of  the  FSU.   Italian  authorities  recently 
seized  approximately  600  kilos  of  cocaine  hidden  inside  pallets 
onboard  a  Russian  commercial  freighter.   It'  is  believed  that  this 
is  just  one  of  the  freighters  under  the  control  of  the  Russian 
drug  mafia.   There  are  also  reports  that  sailors  from  the  Far 
Eastern  Pacific  Fleet  are  returning  from  Vietnam  with  hundreds  of 
kilograms  of  opium  and  cannabis. 

One  should  not  be  deceived  by  the  scarcity  of  arrests  and 
seizures  of  narcotics  in  the  United  States  related  to  FSU 
criminal  groups.   Intelligence  indicates  that  developed  FSU 
criminal  groups  have  vaulted  right  into  the  lucrative  narcotic 
business.   FSU  criminal  groups  are  using  corrupt  FSU  officials, 
porous  borders,  import/export  companies,  transportation 
companies,  etc.,  to  help  distribute  cocaine  across  Europe  where 
the  profit  margin  is  much  greater. 

Customs  investigations  have  demonstrated  that  FSU  criminal 
networks  have  the  capability  and  organizational  skills  to  mount 
successful  drug  courier  operations.  Evidence  that  FSU  criminal 
groups  in  the  United  States  were  developing  more  extensive  ties 
to  international  drug  smuggling  began  to  emerge  in  early  1991. 
Since  that  time  Customs  has  disrupted  two  separate  heroin 
trafficking  rings  involving  FSU  networks. 

The  first  case  developed  in  part  from  intelligence  passed  to 
DEA  from  confidential  sources  indicating  that  U.S.  citizens  of 
Russian  and/or  Polish  background  were  smuggling  heroin  into  the 
United  States.   The  subjects  were  allegedly  arriving  at  JFK 
airport  aboard  commercial  flights  originating  in  Poland  or 
Russia.   The  heroin  itself  originated  in  Thailand  and  was  being 
transported  to  Eastern  Europe  for  shipment  onward  to  the  United 
States.   Concurrent  with  this  intelligence,  DEA  purchased  roughly 
half  a  pound  of  heroin  from  two  members  of  the  FSU  smuggling 


107 


organization. 

This  joint  investigation  between  Customs  and  DEA  eventually 
led  to  the  arrests  of  18  people.   An  important  aspect  of  this 
case  was  not  only  that  it  demonstrated  the  capabilities  of  FSU 
groups  to  engage  in  heroin  smuggling,  but  also  demonstrated  their 
connections  to  traditional  organized  criminal  groups  who  were  to 
ultimately  receive  the  heroin  and  distribute  it  for  the  FSU 
group. 

More  recently,  Customs  tracked  and  disrupted  an  FSU 
organization  that  was  shipping  heroin  to  the  U.S.  using  both  mail 
and  couriers.   The  investigation  itself  began  when  two  couriers 
of  Russian  extraction  were  arrested  at  JFK  for  smuggling  a  total 
of  about  seven  pounds  of  heroin.  Both  couriers,  arriving  from 
Poland,  had  strapped  the  heroin  to  their  bodies.   Each  individual 
indicated  that  he  had  successfully  smuggled  a  similar  quantity  at 
least  once  in  the  past.   Operating  very  similarly  to  the  case 
listed  above,  this  organization  is  alleged  to  have  shipped  as 
much  as  2  kilograms  of  heroin  a  month  to  the  U.S. 

The  organization  used  a  small  but  effective  group  of 
couriers  who  retrieved  the  heroin  in  three  different  locations: 
Poland,  Belgium,  and  Israel.   In  each  case,  the  heroin  was 
shipped  to  these  locations  from  Southeast  Asia  where  the  FSU 
organization  had  supply  connections.   The  heroin  was  generally 
shipped  to  the  transit  points  packed  inside  television  tubes  and 
stuffed  animals.   The  couriers,  who  body  packed  the  heroin,  would 
return  to  the  U.S.  through  three  points:   New  York,  Boston,  and 
Chicago.   Once  in  the  U.S.,  the  heroin  was  distributed  to  various 
individuals  responsible  for  selling  the  drug,  including  Hispanic 
and  traditional  organized  crime  elements.   During  the  course  of 
the  investigation,  at  least  four  of  the  organization's  couriers 
were  apprehended  as  well  as  a  large  portion  of  the  group's 
members.  (See  Chart) 

Two  variations  of  the  group's  modus  operandi  included 
sending  couriers  to  Israel,  where  the  heroin  was  passed  to  them. 
The  couriers  then  returned  to  Canada  instead  of  the  United 
States.   Once  in  Canada,  the  heroin  was  placed  on  another  courier 
who  was  concealed  inside  a  car  which  was  driven  across  the  border 
into  the  United  States.   The  other  variation  used  direct  mail 
shipments  to  the  U.S.  from  Brussels. 

In  addition  to  heroin,  citizens  from  the  FSU  have  been 
detected  with  cocaine,  steroids  and  other  illegally  obtained 
prescription  drugs.   More  recently,  opium  shipped  in  the  mail 
from  the  FSU  has  been  detected  at  our  borders. 

Heroin,  hashish  and  cannabis  are  being,  transported  overland 
across  the  Baltic  route  to  Europe.   A  significant  portion  of  this 
contraband  is  then  transported  to  the  United  States  by  couriers 


108 


or  commercidl  cargo. 

with  the  arrival  of  a  capitalist  economic  system  in  the  FSU 
a  large  number  of  chemists  are  now  unemployed  for  the  first  time 
in  their  lives.   A  number  have  turned  to  the  production  of 
synthetic  narcotics  to  generate  an  income.   Russian  law 
enforcement  authorities  fear  that  Russia  has  the  potential  of 
becoming  a  major  center  for  the  manufacture  of  synthetic 
narcotics . 

The  Customs  Service  established  that  some  Russian/Eurasian 
organized  crime  groups  are  becoming  involved  in  trafficking  of 
controlled  substances  in  the  United  States.   Furthermore,  based 
on  the  drug  trafficking  activities  of  Russian/Eurasian  organized 
crime  groups  in  Eastern  and  Central  Europe,  available  indicators 
suggest  that  the  involvement  of  Russian/Eurasian  organized  crime 
figures  in  drug-related  crimes  in  the  United  States  will 
increase.   With  the  growing  frequency  of  travel  between  Russia, 
the  rest  of  Europe,  and  the  United  States,  the  United  States  has 
become  increasingly  available  to  Russian/Eurasian  organized  crime 
groups  as  a  site  for  criminal  activities,  including  drug 
trafficking . 

For  example,  as  illustrated  in  the  attached  chart,  the 
framework  for  the  establishment  of  Russian/Eurasian  drug 
trafficking  networks  into  the  United  States  is  already  in  place. 
Using  existing  Russian/Eurasian  organized  crime  contacts  and 
activities  in  the  United  States,  drug  trafficking  by  those  groups 
could  rapidly  increase  in  the  near  future.   Some  Russian/Eurasian 
criminals  currently  in  the  United  States,  or  with  influence  and 
contacts  in  this  country,  are  adept  in  the  international 
smuggling  of  a  variety  of  contraband.   That  expertise  obviously 
can  be  used  to  facilitate  the  large-scale  involvement  of 
Russian/Eurasian  organized  crime  groups  in  American  drug 
trafficking. 

FSU  criminal  groups  continue  to  use  the  establishment  of 
front  companies  in  the  United  States  and  throughout  the  world  to 
cleanse  illicit/stolen  money  from  the  FSU.   The  companies  are 
also  used  for  other  related  organized  criminal  activities.   They 
are  used  to  obtain  visas  fraudulently  for  many  FSU  criminal 
figures  seeking  to  enter  the  United  States.   Once  in  the  United 
States  these  individuals  then  concentrate  on  expanding  their 
money  laundering  and  other  criminal  activities. 

VISA  FRAUD  and  MONEY  LAONDERING 

The  involvement  of  front  companies  to  file  suspect 
employment  based  non-immigrant  and  immigrant  visa  petitions  for 
known  and  suspected  FSU  criminal  figures  continues  to  increase. 
According  to  the  U.S.  Department  of  State,  in  Russia,  visas 
appear  to  be  a  potentially  major  loophole  through  which  companies 


109 


can  be  established  in  the  United  States  for  the  purpose  of  money 
laundering  and  other  organized  crime  related  activities.   The 
U.S.  Department  of  State's  Bureau  of  Diplomatic  Security,  which 
has  statutory  authority  in  visa  fraud  cases,  and  INS  have  a 
substantial  number  of  investigations  targeting  such  companies. 

Although  this  is  not  a  new  phenomenon,  the  increase  in  the 
number  of  companies  and  individuals  involved  is  staggering. 
Historically,  FSU  criminal  groups/figures  have  been  known  to  be 
excellent  white  collar  criminals  who  set  up  numerous  companies  to 
help  masquerade  their  frauds.   An  example  of  this  was  a  company 
called  M&S  INTERNATIONAL  which  was  based  in  Antwerp,  Belgium. 
M&S  was  owned  by  Rachmiel  BRANDWAIN,  who  was  a  close  associate  of 
Boris  NAYFELD,  a  well  known  FSU  criminal  who  operated  out  of 
Brighton  Beach  in  Brooklyn,  NY.   According  to  the  attached  copy 
of  the  October  2,  1995,  Newsweek  article,  in  the  late  1980's 
BRANDWAIN  was  the  middleman  who  helped  corrupt  Soviet  Army 
officials  stationed  in  East  Germany  siphon  more  than  a  billion 
dollars  in  illegal  deals.   He  used  his  companies  and  connections 
to  assist  the  officers  in  hiding  the  illegal  millions  in  offshore 
companies  and  bank  accounts.   BRANDWAIN  acknowledges  his  role  in 
this  scheme.   Subsequently,  Boris  NAYFELD  and  a  number  of  people 
associated  with  BRANDWAIN  and  his  companies  were  arrested  for 
smuggling  heroin  into  the  United  States. 

This  panoply  of  criminal  activities  will  complicate  Custom.s 
efforts  in  detecting  illicit  funds  laundering/drug  smuggling 
networks  while  easing  the  fraudulent  entry  of  suspected  FSU 
organized  crime  members  into  the  United  States. 

Currently,  the  Customs  Service  is  investigating  money 
laundering  activities  centered  around  front  companies  that  have 
been  set  up  in  the  United  States  to  cleanse  illicit/stolen  money 
from  the  FSU.   The  FSU  authorities  have  provided  the  initial 
information  to  start  the  investigations. 

Trafficking  In  Radioactive  Materials 

The  theft  and  sale  of  nuclear  materials  from  the  FSU  is  of 
great  concern  to  the  entire  world.   The  world's  stability  depends 
upon  the  control  of  nuclear  weapons  and  technology.   If  terrorist 
groups  or  nations  like  North  Korea  and  Iraq'  are  able  to  purchase 
nuclear  materials  or  technology  from  disenchanted  scientists  and 
technicians  from  the  FSU,  and  use  them  to  fabricate  nuclear 
weapons,  the  nature  of  the  threat  facing  the  United  States  and 
our  allies  would  increase  significantly.   FSU  criminal  groups 
have  little  regard  for  world  stability. 

According  to  the  attached  copy  of  the  October  23,  1995,  U.S. 
News  &  World  Report  article,  an  illicit  deal  to  sell  beryllium 
was  orchestrated  by  a  trading  firm  with  ties  to  Russian  organized 
crime  in  the  Sverdlovsk  region  of  Russia  in  early  1992.   The 


no 


11 

beryllium  was  shipped  from  a  restricted  nuclear  research  facility 
near  the  city  of  Obninsk  to  Moscow,  then  on  to  Yekaterinburg,  in 
the  Sverdlovsk  region.   It  was  then  transported  to  Vilnius, 
Lithuania.   The  probability  that  this  type  of  movement  could  take 
place  without  the  participation  of  corrupt  officials  is  unlikely. 

Prior  to  the  seizure,  an  Austrian  firm  was  prepared  to  pay 
$2.7  million  for  the  beryllium.   It  was  reported  that  the  firm 
had  lined  up  a  buyer  in  Zurich,  who  was  willing  to  pay  $24 
million  for  the  shipment.   This  buyer  was  said  to  represent  a 
Korean  interest.   The  beryllium  had  caused  a  brief  gang  war  in 
Vilnius,  where  a  local  crime  group  tried  to  extort  money  from 
this  smuggling  operation,  and  resulted  in  ten  men  being  killed. 

The  theft  and  sale  of  nuclear  materials  from  the  FSU 
continues  to  be  of  great  concern  to  the  entire  world.   It  has 
already  been  documented  on  several  occasions  that  criminal  groups 
from  the  FSU  have  taken  advantage  of  this  situation  and  attempted 
to  smuggle  and  sell  these  materials  to  the  highest  bidder.   The 
mind  set  of  FSU  criminals  is  to  acquire  money,  which  in  the  FSU 
is  power,  and  they  will  go  to  any  extreme  to  achieve  their  goal. 

A  growing  problem  related  to  the  dramatic  growth  of  criminal 
activity  emanating  from  Eurasia  and  Eastern  Europe  is  that  of 
increased  criminal  trafficking  of  low-enriched  nuclear  materials 
and  related  radioactive  materials.   Information  received  by 
Customs  from  a  variety  of  sources  indicates  that  the  theft  and 
smuggling  of  these  materials  from  the  former  Soviet  Union  and 
Eastern  Europe  are  appearing  with  increasing  frequency  in  Germany 
and  elsewhere. 

Europe  first  began  to  experience  multiple  incidents 
involving  illicit  low-grade  nuclear  materials  in  1991.   These 
incidents  suggested  that  strategic  materials  from  sources  in  the 
former  Soviet  Union  and  from  the  former  Eastern  Bloc  countries 
were  being  illegally  obtained,  smuggled  and  illicitly  offered  for 
sale  in  Western  Europe.   An  example  of  this  is  our  undercover 
investigation  into  the  illegal  sale  of  nuclear-grade  zirconium  to 
Iraq.   This  case  is  currently  at  the  prosecution  stage. 

There  also  are  serious  concerns  over  the  potential  for  the 
illicit  acquisition  and  trafficking  of  a  wider  range  of  nuclear 
and/or  radioactive  materials  which  are  more  commonly  available, 
as  well  as  commercially  useable  and  saleable  substances,  such  as 
cesium,  osmium,  radium  and  others.   Included  in  this  category  are 
Plutonium  and  uranium,  in  quantities  and  at  isotopic  purity 
levels  well  below  weapons-grade.   Materials  in  this  category  can 
be  more  easily  obtained  by  theft  from  nuclear,  industrial  and 
research  facilities,  than  can  weapons-grade  material.   An  example 
of  this  is  our  investigation  of  stolen  and  smuggled  non- 
radioactive isotopes  by  our  Detroit  office. 


Ill 


12 


In  evaluating  the  current  threat  posed  by  this  illicit 
trafficking  in  nuclear  and  nuclear-related  materials,  it  is 
necessary  to  distinguish  between  what  has  been  offered  for  sale 
on  the  black  market,  and  what  is  actually  available  for  purchase 
as  determined  through  law  enforcement  investigations.   During 
1992  and  1993,  suspected  bogus  representations  surrounding  these 
offers  to  sell  were  numerous,  and  in  1992  and  1993,  there  were 
confirmed  illicit  transactions  in  Europe  which  involved  highly 
enriched  uranium  and  plutonium. 

CONCLUSION 

We  live  today  in  a  global  community.   Technology, 
communications,  and  the  availability  of  rapid  travel  enable 
organized  criminals  to  conduct  international  criminal  schemes  on 
a  global  scale.   The  U.S.  Customs  Service  has  undertaken  a  number 
of  initiatives  with  the  dual  objectives  of  both  seizing  the 
contraband  and  identifying/arresting  the  perpetrators.   Through 
the  continuing  collective  efforts  of  the  Departments  of  Treasury, 
State,  Justice,  Defense,  Energy,  Commerce,  the  Intelligence 
Community,  and  our  foreign  counterparts,  Customs  will  continue  to 
promote  global  security  through  enhanced  border  initiatives. 


112 


ATTACHMENT  I 


INVESTIGATIVE  EXAMPLES 

The  following  examples  attempt  to  illustrate  the  nature, 
complexity  and  diversity  of  organized  crime  cases  that  Customs 
investigates  as  a  matter  of  priority  and  mission. 

FSU  criminal  syndicates  are  active  in  at  least  four  areas 
directly  relevant  to  Customs  enforcement  programs:   drug 
smuggling,  money  laundering,  commercial  fraud,  and  the  smuggling 
of  other  illegal  contraband,  including  weapons,  strategic 
minerals,  precious  metals,  icons,  and  stolen  vehicles. 

Heroin  Smuggling 

During  June,  1991,  New  York  Customs  Agents  initiated  an 
investigation  into  heroin  smuggling  activities  as  a  result  of  the 
arrest  of  two  Russian  couriers  who  arrived  at  JFK  international 
airport  with  an  aggregate  amount  of  3.209  grams  of  heroin 
secreted  in  body  girdles.   The  heroin  originated  in  Thailand. 
This  investigation  disclosed  the  existence  of  an  extensive 
network  of  heroin  couriers,  comprised  of  Russian,  and  former 
Russian  nationals  who  were  entering  the  United  States  at  New 
York,  and  Boston  on  a  bi-monthly  basis. 

This  investigation  provided  substantial  insight  into  the 
insular  world  of  drug  trafficking  by  FSU  criminal  enterprises  by 
illustrating  the  complexity  of  investigating  an  unique  divergence 
of  both  culture  and  language.   With  the  advent  of  heroin's 
resurgence  in  America,  this  investigation  ultimately  dismantled  a 
network  of  heroin  couriers  who  possessed  the  potential  to  supply 
a  major  portion  of  the  eastern  coast  of  the  United  States. 

The  arrest  of  the  two  couriers  ultimately  evolved  into  a 
five  year  investigation  which  revealed  the  smuggling  of  heroin 
via  individual  courier,  and  the  international  mail  system.   What 
remained  consistent  throughout  this  investigation  was  that  the 
consignee  was  always  within  the  confines  of  the  Russian  emigre 
community  of  New  York  city. 

This  joint  Customs/DEA  investigation  ultimately  concluded  in 
1995  with  the  arrests  and  convictions  of  fourteen  defendants  and 
the  seizure  of  5,922  grams  of  heroin.   While  this  single 
investigation  does  not  infer  that  all  Russian  travelers  or 
emigres  in  the  United  States  are  involved  ih  these  criminal 
activities,  the  distinct  insularity  of  the  Russian  community 
within  the  United  States  in  terms  of  cultural  and  social  norms 
greatly  aids  in  the  concealment  and  expansion  of  these 
activities. 


113 


EXPORTING  OF  STOLEN  CARS 

There  are  a  number  of  ongoing  Customs  stolen  car  export 
cases  throughout  the  country  involving  FSU  emigres.   A  good 
American  car  is  selling  anywhere  from  two  to  three  times  its 
value  m  the  FSU.   Law  enforcement  has  determined  that  emerging 
organized  crime  groups  utilize  the  stealing,  illegal  exportation, 
and  sale  of  stolen  vehicles  as  a  relatively  safe  way  to  obtain 
capital  to  finance  their  other  criminal  ventures,  drugs,  weapons, 
etc.   The  current  cars  of  choice  are  four  wheel  drive  vehicles. 
Several  Customs  investigations  from  around  the  country  are 
currently  underway  into  the  illegal  exportation  of  stolen 
vehicles  from  the  U.S.  to  FSU  countries.   The  minimum  value  of 
the  vehicles,  luxury  cars  and  construction  equipment,  recovered 
by  Customs  so  far,  totals  $25,000,000,  and  we  have  made  77 
arrests . 

One  case  of  particular  interest  is  a  SAC  Chicago  case.   A 
group  of  FSU  emigres  were  shipping  vehicles  that  were  stolen  in 
New  York,  driven  to  Chicago  and  secreted  inside  containers  and 
exported  to  the  FSU.   A  number  of  arrests  have  been  made  in  this 
case.   One  of  the  individuals  arrested  was  Ritchardas 
VASILIAVITCHIOUS  believed  to  be  the  organizer/ leader  of  this 
group.   VASILIAVITCHIOUS  was  once  the  bodyguard  for  Monya  EISON, 
but  they  had  a  disagreement,  and  VASILIAVITCHIOUS  was  shot  and 
wounded  in  New  York  and  fled  to  Chicago.   In  the  New  York  area, 
other  FSU  emigre  stolen  car  groups  have  been  dismantled  by 
Customs  and  local  authorities. 

Agents  of  the  United  States  Customs  Service,  SAC  Miami, 
and  detectives  of  the  Metro-Dade  Auto  Theft  Task  Force 
investigated  Paulo  and  Nikita  KOBIAKOV  and  other  members  of  a 
group  involved  in  the  exportation  of  stolen  vehicles  to 
Venezuela,  Ecuador  and  the  Dominican  Republic. 

The  investigation  into  this  group  was  initiated  during 
November  1994,  with  the  recovery  and  seizure  of  stolen  vehicles 
which  were  being  exported  from  Port  Everglades  to  La  Guira, 
Venezuela.   Agents  and  detectives  gathered  information  on  several 
seizures  and  events  which  were  eventually  linked  to  the  KOBIAKOVS 
and  two  Florida  corporations. 

On  January  20,  1995,  as  a  result  of  the  investigation, 
Nikita  KOBIAKOV  was  arrested  and  charged  with  dealing  in  stolen 
property.   Once  Nikita  was  freed  on  bond  he  fled  the  United 
States  and  took  up  residence  in  Venezuela.   Paulo  KOBIAKOV 
then  took  over  the  U.S.  operations  while  Nikita  coordinated 
distribution  of  the  stolen  vehicles  in  South  America.   Due  to  the 
lack  of  effective  export  controls  in  South  America  it  is  believed 
that  a  number  of  the  vehicles  were  shipped  to  Europe  and  possibly 
the  former  Soviet  Union  in  a  money  laundering  and  narcotics 
smuggling  venture. 

During  October  1995,  information  provided  by  a  confidential 


114 


source  and  the  surveillance  of  two  warehouses  resulted  in  the 
seizure  of  vehicles  and  the  identification  of  several  violators. 
While  tracking  down  undeveloped  leads,  more  and  more  information 
pointed  to  the  involvement  of  the  KOBIAKOVS  and  their  Florida 
corporations . 

This  information  was  presented  before  a  Grand  Jury  in  the 
Southern  District  of  Florida,  resulting  in  the  indictment  of 
Nikita  and  Paulo  Kobiakov  and  10  members  of  the  group  for 
violating  and  conspiring  to  violate  Federal  law. 

Fraudulent  Avionics  and  Radio  Parts  Case 

Several  investigations  involve  the  sale,  export  and/or 
diversion  of  weapons,  military  hardware,  critical  high 
technology,  precursor  chemicals  for  biological  warfare,  military 
aircraft  parts,  and  assorted  missile  systems.   Some  of  these 
investigations  are  long-term  in  nature  and  involve  complex 
international  conspiracies  that  affect  our  national  security 
and/or  related  foreign  policy  objectives. 

One  example  to  illustrate  this  type  of  investigation  is  from 
our  Resident  Agent  in  Charge  (RAC)  Newark  office.  According 
to  the  U.S.  Navy,  the  Customs  Service  saved  them  millions  of 
dollars  by  the  success  of  our  investigation.  If  not  for  the 
execution  of  search  warrants,  several  product  components 
would  have  been  delivered  to  them  for  installation  within 
our  national  defense  systems. 

While  this  investigation  is  not  a  typical  "Russian  Organized 
Criminal  activity,"  in  that  there  is  no  traditional  "mafia 
hitmen",  or  "legbreakers";  it  does  involve  a  continuing 
criminal  enterprise.   The  violators  were  from  Russia  and 
Iraq.   The  material  was  manufactured  in  the  Ukraine  by 
unemployed  Russian  technicians,  and  the  method  of  payment 
utilised  indicated  money  laundering  by  front  companies.   If 
left  unchecked  this  "enterprise"  could  very  veil  have 
expanded  into  another  Russian  Organizetl  Criminal  Group 
operating  within  our  country. 

Customs  successfully  completed  a  wide  ranging  fraud 
investigation  involving  a  Newark,  New  Jersey  based  company 
that  was  defrauding  the  U.S.  Department  of  Defense  by 
importing  Russian  made  avionics,  satellite  communications, 
radar,  and  radio  components  and  selling  the  equipment  to  the 
United  States  under  military  contracts  as  U.S. -made  parts 
and  equipment.   Two  defendants,  who  are  emigres  from  Russia 
and  Iran,  have  been  indicted  for  allegedly  defrauding  the 
Departments  of  the  Army,  Navy  and  Air  Force.   In  addition  to 
the  fraudulent  imports,  the  U.S.  company  was  exporting  U.S. 
defense  technology  and  data  to  Russia  and  Ukraine  without  an 
export  license,  in  order  that  companies  there  could 
manufacture  the  avionics  and  equipment  to  U.S. 
specifications.   Defense  contracting  regulations  prohibit 


115 


the  manufacture  of  U.S.  weapons  systems  components  by 
overseas  companies,  unless  specifically  authorized  by  the 
Department  of  Defense. 

New  York  Zirconium  Case 

Undercover  Customs  agents  initiated  the  seizure  of  7  tons  of 
nuclear-grade  zirconium  being  shipped  from  Ukraine  to  Iraq 
through  the  U.S.   This  resulted  in  three  arrests. 

In  the  course  of  a  covert  investigation,  Customs  agents 
acting  in  undercover  capacities  effected  the  arrests  of 
three  individuals  who  were  attempting  to  ship  large 
quantities  of  nuclear-grade  zirconium  to  Iraq  in  violation 
of  the  United  States  and  United  Nations  sanctions  against 
Iraq.   During  the  course  of  this  investigation,  the 
defendants  delivered  five  tons  of  zirconium,  believing  it 
was  destined  for  Iraq.   An  additional  two  tons  of  zirconium 
were  delivered  to  U.S.  Customs  undercover  agents  in  Cyprus, 
ostensibly  en  route  to  Iraq.   This  shipment  was  detained  by 
Cypriot  authorities,  and  will  be  returned  to  New  York  as 
evidence  in  the  trial. 

Three  defendants  were  arrested  on  June  8,  1995,  and  the 
above  mentioned  zirconium  was  seized.   The 
investigation  is  continuing  with  the  assistance  of 
the  U.S.  Customs  offices  in  Rome,  Bonn,  and  Milan. 
Law  enforcement  agencies  in  Germany,  Italy, 
Cyprus,  and  states  of  the  former  Soviet  Union  are 
also  cooperating  in  this  investigation. 

According  to  the  defendants,  the  source  for  the  zirconium 
was  a  General  in  Ukraine.   If  the  source  of  the  zirconium  is 
indeed  Ukraine,  this  would  be  the  first  time  weapons-grade 
material  from  the  FSU  has  been  seized  in  the  United  States, 

Detroit  Isotope  Case 

Another  investigation  involves  the  seizure  of  non- 
radioactive isotopes  that  were  illegally  removed  from  Russia  to 
the  U.S.   The  isotopes  have  a  value  in  excess  of  $350  million 
dollars. 

In  February  1995,  the  Royal  Canadian  Mounted  Police  in 
Toronto,  Ontario,  requested  that  U.S.  Customs  assist  in 
locating  more  than  five  hundred  (500)  units  of  non- 
radioactive isotopes  that  were  alleged  to  have  been  stolen 
from  the  Russian  Federation,  shipped  into  Canada,  and  then 
imported  into  the  United  States,  by  Russian  organized  crime 
figures. 

On  February  3,  1995,  the  SAC  Detroit  executed  Federal  search 
warrants  at  the  warehouse  and  recovered  the  stolen  isotopes. 


116 


The  wholesale  value  of  the  isotopes  has  been  placed  at 
520  -  $30  million  with  a  retail  value  of  between  $300  -  $350 
million  dollars.   A  coordinated  investigation  is  being 
conducted  by  the  SAC  Detroit  along  with  the  Royal  Canadian 
Mounted  Police  and  the  Central  Unit  for  Organized 
CriiT.e/Prosecutor  General  Office,  Russian  Federation. 

MONEY  LAUNDERING 

In  recent  months  a  number  of  FSU  emigres  have  been 
arrested/stopped  by  Customs  for  failure  to  declare 
currency/monetary  instruments.   In  one  case,  the  suspect  had 
$90,000  in  U.S.  money  orders  on  his  person.   This  is  a  typical 
method  used  by  many  money  laundering  groups.   Another  individual 
was  stopped  with  $170,000  in  cash.   He  claimed  that  it  was  the 
payroll  for  a  Russian  baseball  team  known  as  the  Red  Devils  that 
were  in  Florida.   This  individual  has  been  connected  to  a  FSU 
emigre  who  was  arrested  by  Customs  attempting  to  smuggle 
marijuana  into  the  United  States  secreted  inside  caviar  cans. 

As  stated  previously  the  FSU  is  facing  a  serious  threat 
regarding  the  illegal  export  of  funds/assets  to  other  countries. 
While  some  legitimate  capital  flight  is  involved,  there  is 
significant  indication  that  many  of  these  funds  originate  from 
fraud,  theft  and  organized  crime  activities.   One  technique 
believed  being  used,  is  that  money  derived  from  criminal  activity 
is  handed  off  to  couriers  at  various  foreign  airports  and 
delivered  to  Moscow.   There  the  money  is  legalized  through 
commercial  banks,  and  transferred  to  European  banks  in  accordance 
with  false  contracts  between  Russian  and  foreign  firms.   The 
money  is  also  laundered  by  purchasing  prime  real  estate 
throughout  the  world,  in  such  places  as,  England,  Monte  Carlo, 
French  Riviera,  and  the  United  States. 

In  many  parts  of  the  United  States  a  number  of  entrepreneur 
class  criminals  have  been  investing  in  real  estate  with  cash 
purchases  from  $200,000  condominiums  to  $2,000,000  for  parts  of 
shopping  malls.   Another  way  the  money  is  laundered  is  the 
legitimate  purchase  of  commodities  that  are  then  exported  to  the 
FSU  and  sold  at  an  enormous  profit.   In  the  early  stages  of  the 
collapse  of  the  Soviet  Union  it  was  reported  that  Russian 
organized  crime  groups  in  the  United  States  sold  rubles  for  U.S. 
currency  to  the  Colombian  Cartels.   The  Cartels  then  bought  gold, 
oil  and  strategic  metals  through  front  companies  in  Russia.   The 
goods  were  then  sold  on  the  world  market,  effectively  laundering 
the  Cartels'  money  and  providing  the  Russian  organized  crime 
groups  with  U.S.  dollars. 

To  provide  another  example,  on  July  15,  1994,  U.S.  Customs 
agents  in  Seattle  received  information  that  a  Russian  male,  who 
was  an  Organized  Crime  figure  from  Vladivostok,  boarded  the 
Russian  vessel  KAPITAN  MAN,  in  Tacoma ,  Washington  in  June  1994, 
on  three  occasions.   The  subject  was  identified  as  being  involved 
in  criminal  activity  in  Russia. 


117 


Based  on  this  information  a  Customs  Treasury  Enforcement 
Communications  System  (TECS)  record  was  created.   On  November  4, 
1994,  Customs  inspectors  at  SEATAC  International  airport 
detained  the  subject  for  failure  to  declare  United  States 
currency.   A  search  revealed  he  had  $20,209  in  United  States 
currency.   Customs  notified  the  Department  of  State  of  the 
information  concerning  the  subject  and  requested  that  if  the 
subject  applied  for  a  visa  for  future  travel  to  the  United  States 
it  be  denied.   Since  that  time  Customs  has  been  advised  that  the 
subject  had  been  denied  re-entry  into  the  United  States,  after 
the  American  Counsel  General-Vladivostok  confirmed  the  subjects' s 
prior  status  as  the  godfather  of  the  Vladivostok  mafia,  and 
involvement  in  a  prior  homicide.   The  subject  is  allegedly 
attempting  to  get  a  Russian  passport  under  a  new  name  so  that  he 
can  re-enter  the  United  States.   State  Department  has  been 
advised  of  this  information. 

STOLEN  PROPERTY  AKD  MONEY  LAUNDERING 

Another  scheme  utilized  by  Russian  organized  crime  groups 
to  finance  their  operations  is  the  purchase  of  merchandise  in  our 
country  by  checking  accounts  with  insufficient  funds. 

On  November  21,  1995,  Sergey  Alexsandrovich  GARKUSHA  was 
arrested  as  he  attempted  to  depart  Seattle-Tacoma  International 
Airport  via  Aeroflot  Airlines  destined  for  Moscow.   GARKUSHA  was 
in  possession  of  merchandise  valued  at  over  $50,000,  purchased 
with  checks  from  a  closed  bank  account.   It  was  later  determined 
GARKUSHA  purchased  merchandise  from  EUROPE  DISTRIBUTORS,  paying 
by  check  from  an  account  bearing  non-sufficient  funds.   GARKUSHA 
was  arrested. 

GARKUSHA  was  subsequently  prosecuted  and  convicted  in  King 
County  District  Court  in  Washington.   GARKUSHA  was  sentenced  to 
credit  for  time  served  with  partial  restitution.   GARKUSHA  was 
remanded  to  INS  custody  and  was  deported  from  the  United  States 
on  January  17,  1996. 

ICONS 

The  illegal  export  of  icons  from  the  FSU  by  organized  crime 
groups  is  also  another  problem  being  addressed  by  U.S.  Customs. 
According  to  Russian  authorities,  the  icons  are  not  allowed  to  be 
exported  out  of  Russia,  except  with  permission  for  exhibition 
purposes,  because  they  are  considered  a  national  treasure.   Every 
person  entering  or  leaving  Russia  has  to  fill  out  a  customs 
declaration  form  which  contains  a  line  item  that  specifically 
addresses  the  requirement  to  declare  the  possession  of  icons. 

Icons  depict  religious  figures  of  the  Russian  Orthodox 
Church  and  were  commissioned  and  painted  primarily  for  churches. 
They  may  depict  any  one  of  a  hundred  or  more  persons,  and  may 
vary  stylistically  (particularly  in  the  facial  features)  by  the 
artist  or  geographic  region  where  they  were  painted. 


118 


After  the  Russian  revolution  in  1915,  churches  were  looted 
and  destroyed.   Under  communism  all  religious  practice  was 
prohibited  and  all  church/religious  property  became  the  property 
of  the  state.   With  the  fall  of  communism  and  the  breakup  of  the 
former  Soviet  Union,  religious  worship  was  no  longer  against  the 
law. 

The  Russian  Orthodox  Church  is  now  recognized  as  a  main 
force  in  maintaining  the  Russian  heritage  and  culture,  and  all 
icons  are  considered  to  be  property  of  the  Church.   Most  icons 
are  kept  in  museums  or  churches  and  are  well  protected.   A 
commission  has  been  established  to  register  icons  with  a  unique 
number;  all  icons  that  do  not  have  a  number  are  turned  over  to 
the  Church. 

Icons  were  being  sold  in  Russia  several  years  ago  (before 
the  fall)  for  approximately  $200  each.  Estimates  are  that  the 
icons  would  sell  for  up  to  $2,000  currently. 

Another  case  occurred  on  November  11,  1993,  at  Cincinnati 
International  airport.   Three  Russian  icons. were  seized  after 
inspectors  discovered  a  false-sided  suitcase.   The  three  icons 
examined  were  of  very  good  quality,  did  not  have  a  registration 
number  on  them,  and  are  considered  as  cultural  heritage  items 
belonging  to  the  Russian  Orthodox  Church.   These  icons  were 
returned  to  the  Russian  authorities. 

OTHER  ORGANIZATIONS  and  INTERESTS 

There  are  various  estimates  on  the  number  of  Russian  groups 
operating  in  the  United  States.   Some  estimates  range  from  3-4  to 
approximately  24  different  organizations.   The  following  are  some 
of  the  major  organizations  in  which  Customs  maintains  an  ongoing 
investigative  and  law  enforcement  intelligence  interest  in: 

Most  of  Customs  efforts  have  been  directed  at  the 
ORGANIZASITYA  which  is  based  in  New  York  but  which  has  cells  on 
the  West  Coast,  Denver,  Colorado,  and  in  the  South  (Miami) . 
Overall,  there  is  evidence  of  Russian  criminal  activity  in  New 
York,  California,  Florida,  Illinois,  Maryland,  Michigan,  Ohio, 
Oregon,  Pennsylvania,  Washington  State,  Massachusetts,  and 
Colorado.   The  chart  behind  me  illustrates  several  FSU  Organized 
crime  groups  and  their  areas  of  interest. 

The  ORGANIZATSIYA.   This  group  is  comprised  of  Russian, 
Ukrainian,  Armenian  and  Georgian  criminals  within  the  Brighton 
Beach  area  of  Brooklyn,  New  York.   The  ORGANIZATSIYA  has  been  in 
operation  in  the  United  States  since  the  middle  1970' s  with  the 
first  influx  of  Jewish  emigres  from  the  FSU.   The  true  structure, 
size  and  operational  components  of  the  ORGANIZATSIYA  are  not 
entirely  known  since  there  is  limited  available  intelligence, 
investigative  and  source  information.   The  composition  of  the 
ORGANIZATSIYA  appears  to  be  separate  cells  that  cooperate  in 
situations  of  mutual  interest  and  shift  alliances  to  meet 


119 


particular  needs. 

Finally,  the  BRANDWAIN  Group  is  based  in  Brussels,  Belgium. 
BRANDWAIN  is  reported  to  be  the  godfather  of  Russian  criminal 
exiles  in  Belgium.   He  is  listed  as  the  president  of  various 
corporations,  many  of  which  have  commercial-  linkages  to  the 
United  States.   He  is  also  believed  to  be  involved  in  narcotics 
trafficking,  money  laundering,  extortion,  murder  and  the 
smuggling  of  stolen  autos/parts  into  the  FSU. 

In  the  United  States,  there  are  a  variety  of  Estonian, 
Lithuanian  and  Armenian  groups  which  are  engaged  in  organized 
crime.   Numerous  investigations  have  been  initiated  regarding 
organized  crime  from  the  former  Soviet  Union.   These  cases  have 
been  centered  in  Philadelphia,  Pennsylvania;  California; 
Connecticut;  and  New  York. 

Trade  fraud  cases  connected  to  FSU  emigre  crime  are 
beginning  to  grow.   Recent  cases  have  involved  marking  violations 
on  polished  diamonds,  uranium,  caviar,  and  pianos. 

U.S.  Customs  weapons  smuggling  cases  to  date  have  largely 
been  concerned  with  relatively  low-level  military  armaments  and 
materials  such  as  AK-47  assault  rifles,  plastique,  and  night 
vision  devices. 

FOGITIVE  ISSUES 

Currently,  we  do  not  have  any  major  fugitive  problems 
relating  to  Russian  organized  crime.   However,  we  do  have  several 
fugitives  that  are  associated  with  Russian  Organized  Crime.   The 
Customs  crimes  that  they  have  been  indicted  for  include,  money 
laundering,  vehicle  theft,  fraud,  arms  smuggling,  and  narcotics 
smuggling.   With  the  projected  rate  of  Russian  organized  crime  in 
the  United  States  and  their  projected  involvement  in  trans- 
national crimes,  it  is  envisioned  that  fugitive  issues  will 
become  more  prevalent  in  the  near  future. 


120 

STATEMENT  OF  JIM  E.  MOODY 
DEPUTY  ASSISTANT  DIRECTOR 

CRIMINAL  INVESTIGATIVE  DIVISION 
FEDERAL  BUREAU  OF  INVESTIGATION 

ON  BEHALF  OF  FBI  DIRECTOR  LOUIS  J.  FREEH,  I  APPRECIATE 
THE  OPPORTUNITY  TO  TESTIFY  BEFORE  YOUR  COMMITTEE  AND  DISCUSS  SOME 
ISSUES  RELATED  TO  RUSSIAN,  EASTERN  EUROPEAN  AND  EURASIAN  CRIMINAL 
ENTERPRISE  GROUPS  THAT  ARE  A  CONCERN  TO  THE  FBI,  AS  WELL  AS  THIS 
COMMITTEE.   IT  IS  THE  FBI'S  BELIEF  THAT  THE  EMERGENCE  IN  THE 
UNITED  STATES  OF  THESE  VERY  DANGEROUS,  CRIMINALLY  DIVERSE  AND 
ORGANIZED  GROUPS  HAS  CAUSED  A  SIGNIFICANT  EXPANSION  OF  OUR  CRIME 
PROBLEM.   THE  FBI  IS  TAKING  AN  AGGRESSIVE  STANCE  IN  ADDRESSING 
THESE  CRIMINAL  ENTERPRISES,  DOMESTICALLY  AND  INTERNATIONALLY,  TO 
KEEP  THEM  FROM  BECOMING  ENTRENCHED  IN  THE  UNITED  STATES. 

GRAVE  CRIME  IS  NO  LONGER  BOUND  BY  THE  CONSTRAINTS 
OF  BORDERS.   SUCH  OFFENSES  AS  TERRORISM,  NUCLEAR  SMUGGLING, 
ORGANIZED  CRIME,  COMPUTER  CRIME,  AND  DRUG  TRAFFICKING  CAN  SPILL 
OVER  FROM  OTHER  COUNTRIES  INTO  THE  UNITED  STATES.   REGARDLESS  OF 
ORIGIN,  THESE  AND  OTHER  OVERSEAS  CRIMES  IMPACT  DIRECTLY  ON  OUR 
CITIZENS  AND  OUR  ECONOMY. 

WE  HAVE  DEVELOPED  A  VARIETY  OF  ANTI -CRIME  EFFORTS  BOTH 
HERE  AND  ABROAD  TO  COMBAT  THESE  DANGEROUS  THREATS.   THIS  EFFORT 
HAS  BEEN  UNDERTAKEN  WITH  THE  SUPPORT  OF  THE  PRESIDENT  AND  THE 
ATTORNEY,  GENERAL  JANET  RENO.  ONE  OF  THE  MOST  EFFECTIVE  WAYS  TO 
FIGHT  INTERNATIONAL  CRIME  IS  BY  BUILDING  COP-TO- COP  BRIDGES 
BETWEEN  AMERICAN  LAW  ENFORCEMENT  AND  OUR  OVERSEAS  COUNTERPARTS. 
WITHOUT  THESE  RELATIONSHIPS,  THERE  CANNOT  BE  THE  COMMONALITY  OF 
PURPOSE  AND  OPEN  COMMUNICATION  REQUIRED  FOR  SUCCESS.   MORE  AND 
MORE  OF  THESE  BRIDGES  ARE  BEING  BUILT,  AND  SUCCESSES  ARE  FLOWING 
FROM  THEM. 


121 


WE  ARE  USING  A  NUMBER  OF  APPROACHES  TO  DEVELOP 
COOPERATIVE  LAW  ENFORCEMENT  PROGRAMS  WITH  OTHER  COUNTRIES. 
FOR  EXAMPLE,  OUR  LEGAL  ATTACHE  PROGRAM  WORKS  CLOSELY  WITH  A  LARGE 
NUMBER  OF  FOREIGN  POLICE  FORCES.   NOT  ONLY  DO  THEY  COOPERATE  ON 
SPECIFIC  CASES,  BUT  OUR  LEGAL  ATTACHES  --  WHO  ARE  HIGHLY-SKILLED 
SENIOR  FBI  AGENTS  --  ALSO  FORM  A  SORT  OF  DISTANT  EARLY  WARNING 
SYSTEM  TO  ALERT  US  TO  NEW  AND  EMERGING  CRIME  THREATS. 

ANOTHER  VERY  POWERFUL  TOOL  IS  TRAINING:   THE  FBI 
PLACES  A  HIGH  PRIORITY  ON  ASSISTING  OUR  FOREIGN  LAW  ENFORCEMENT 
COUNTERPARTS  THROUGH  TRAINING  COURSES  HERE  AND  ABROAD.   AND  JUST 
A  YEAR  AGO,  WE  TOOK  A  MAJOR  COOPERATIVE  STEP  WITH  OTHER  FEDERAL 
AGENCIES  AND  OTHER  FOREIGN  NATIONS  WITH  THE  CREATION  OF  THE 
INTERNATIONAL  LAW  ENFORCEMENT  ACADEMY  IN  BUDAPEST. 

THESE  AND  OTHER  PROGRAMS  COMBINE  TO  HELP  GIVE  THE 
FBI  THE  CRITICAL  FOUNDATION  NEEDED  TO  EFFECTIVELY  COMBAT 
INTERNATIONAL  CRIME. 

THIS  IS  A  RARE  OPPORTUNITY  TO  EXTEND  THE  RULE  OF  LAW 
WHILE  MOBILIZING  LAW  ENFORCEMENT  TO  MEET  THE  EXPLOSION  OF 
INTERNATIONAL  CRIME  AGAINST  AMERICA.   WE  ARE  EXCEEDINGLY  GRATEFUL 
FOR  THE  SUPPORT  CONGRESS  HAS  GIVEN  US  AS  WE  DEVELOP.  A  STRONGER 
GLOBAL  NETWORK  OF  EFFECTIVE  LAW  ENFORCEMENT.   YOUR  SUPPORT  OF  LAW 
ENFORCEMENT  TRAINING  AT  THE  DEPARTMENT  OF  STATE  HAS  BEEN  CRITICAL 
TO  THE  SUCCESS  OF  OUR  PROGRAMS. 

THE  INTERNATIONAL  CRIME  PROBLEM 

THE  POLITICAL,  SOCIAL,  AND  ECONOMIC  CHANGES  OCCURRING 


122 


IN  EASTERN  EUROPE  AND  IN  THE  FORMER  SOVIET  REPUBLICS  HAVE 
PROVIDED  SIGNIFICANT,  UNINTENDED  OPPORTUNITIES  FOR  ORGANIZED 
CRIME  GROUPS  AND  CRIMINAL  ENTERPRISES  IN  THESE  COUNTRIES  TO 
EXPAND  INTERNATIONALLY.   EVIDENCE  THAT  ORGANIZED  CRIME  ACTIVITY 
FROM  THESE  AREAS  IS  EXPANDING  AND  WILL  CONTINUE  TO  EXPAND  TO  THE 
UNITED  STATES  IS  WELL -DOCUMENTED. 

THESE  CRIMINAL  ENTERPRISES  ARE  NOT  A  NEW  PHENOMENON  TO 
RUSSIA.   THEY  EXISTED  UNDER  COMMUNISM.   APPROPRIATE  LEGAL  TOOLS 
WERE  NOT  CREATED  TO  CONTROL  ORGANIZED  CRIME  AND  CORRUPTION 
ACTIVITIES.   WHEN  COMMUNISM  DECLINED  IN  THE  SOVIET  UNION,  THE 
ORGANIZED  CRIME  GROUPS  QUICKLY  EXPANDED  THEIR  INFLUENCE  IN  THE 
EMERGING  MOVE  TOWARD  CAPITALISM,  AGAIN  BECAUSE  SUFFICIENT 
CONSTRAINTS  AND  LAW  ENFORCEMENT  TOOLS  WERE  NOT  PRESENT. 

THE  FBI  HAS  MANY  YEARS  OF  SUCCESSFUL  INVESTIGATIVE  AND 
PROSECUTORIAL  EXPERIENCE  IN  THE  BATTLE  WITH  LA  COSA  NOSTRA  AND 
OTHER  ORGANIZED  CRIME  GROUPS  HERE  IN  THE  UNITED  STATES.   WE  VIEW 
ORGANIZED  CRIME  AS  A  CONTINUING  CRIMINAL  CONSPIRACY  HAVING  A 
•FIRM  ORGANIZATIONAL  STRUCTURE,  A  CONSPIRACY  FED  BY  FEAR  AND 
CORRUPTION.   THIS  DEFINITION  CAN  ALSO  BE  APPLIED  TO  THE  ORGANIZED 
CRIME  THREAT  FACING  RUSSIA  AND  MANY  OTHER  COUNTRIES.   MEMBERS  OF 
A  TYPICAL  RUSSIAN  ORGANIZED  CRIME  GROUP  ARE  FOUND  AT  EVERY  LEVEL 
OF  SOCIETY.   ORGANIZED  CRIME  ACTIVITY  IN  RUSSIA  INCLUDES  MONETARY 
SPECULATION,  MANIPULATION  OF  THE  BANKING  SYSTEM,  AND  EMBEZZLEMENT 
OF  STATE  PROPERTY,  AS  WELL  AS  CONTRACT  MURDER,  EXTORTION,  DRUG 
TRAFFICKING,  PROSTITUTION,  PROTECTION  RACKETS,  AND  INFILTRATION 
OF  LEGITIMATE  BUSINESS  ACTIVITY. 


123 


TO  MAKE  h4ATTERS  WORSE,  A  NUMBER  OF  RUSSIAN/EURASIAN 
ORGANIZED  CRIME  GROUPS  AND  CRIMINAL  ENTERPRISES  PRESENTLY  OPERATE 
IN  THE  U.S. 

MANY  OF  THESE  CRIMINAL  ENTERPRISES  ACTIVE  IN  THE  U.S. 
HAVE  DEMONSTRATED  A  WILLINGNESS  TO  WORK  IN  CLOSE  CONCERT  WITH 
OTHER  NON-RUSSIAN/NON- EURASIAN  ORGANIZED  CRIME  GROUPS. 

WE  HAVE  SEEN  TWO  TYPES  OF  RUSSIAN  CRIMINAL  ENTERPRISES 
WORKING  WITHIN  THE  UNITED  STATES.   THE  FIRST  TYPE  MAY  BE  MORE  APT 
TO  BE  CALLED  "FRAUD  AND  ALL  OTHER  TYPES  OF  CRIMES,  ALL  DESIGNED 
TO  OBTAIN  MONEY,  PERPETRATED  BY  RUSSIAN  SPEAKING  INDIVIDUALS". 
IN  THIS  FRAUD/ FINANCIAL  CRIME  AREA,  IT  APPEARS  TO  BE  MORE  CRIMES 
OF  OPPORTUNITY,  SOMETIMES  ORGANIZED  BY  INDIVIDUALS  ,  INCLUDING 
GOVERNMENT  OFFICIALS,  ALL  DESIGNED  TO  ILLEGALLY  OBTAIN  MONEY. 

AS  WITNESS  WHAT  HAS  ALREADY  OCCURRED  IN  THE  UNITED 
STATES  WITH  ALL  MANNERS  OF  FRAUD,  MULTI -MILLION  DOLLAR  GASOLINE 
TAX  AND  MEDICAL  INSURANCE  FRAUDS  FOR  EXAMPLE,  IT  IS  BELIEVED  THIS 
WILL  BE  A  PARTICULARLY  MAJOR  CRIME  PROBLEM  FOR  THE  UNITED  STATES. 

AS  REGARDS  ORGANIZED  CRIME,  THERE  IS  NO  DOUBT  THAT 
RUSSIAN  ORGANIZED  CRIME  GROUPS,  LIKE  THE  SOLNTSEVSKAYA  GROUP  AND 
THE  ORGANIZATSIYA  GROUP,  EXIST  AND  ARE  QUITE  POWERFUL.   THESE 
GROUPS  HAVE  MEMBERS  HERE  IN  THE  UNITED  STATES  AND  ARE  ATTEMPTING 
TO  GET  A  FOOTHOLD  IN  THE  U.S.   THESE  GROUPS  WHICH  RESORT  TO 
EXTORTION,  KIDNAPING,  DRUGS,  AND  OTHER  VIOLENT  CRIME  FOR  SOME  OF 
THEIR  MAIN  REVENUE  ARE  EASIER  TO  IDENTIFY,  COLLECT  EVIDENCE 
AGAINST  AND  ULTIMATELY  CONVICT  AND  INCARCERATE. 


124 


IT  IS  BELIEVED  THE  KEY  FOR  U.S.  AND  WESTERN  LAW 
ENFORCEMENT,  IN  NEUTRALIZING  THE  FINANCIAL  'FRAUDSTERS"  AND  OC 
GROUPS,  IS  TO  IDENTIFY  AND  CONFISCATE  THEIR  ILL  GOTTEN  GAINS, 
I.E.  THE  "MONEY".   EFFORTS  ARE  UNDERWAY  IN  THIS  AREA  BUT  MUCH 
STILL  RKMAINS  TO  BE  DONE.   IN  1994,  THE  MVD  ESTIMATED  THAT  $50 
BILLION  ILLEGALLY  LEFT  RUSSIA,  MUCH  OF  IT  DESTINED  FOR  THE  UNITED 
STATES . 

THE  UNITED  STATES  AND  RUSSIA  FULLY  REALIZE  THE  NEED 
FOR  JOINT  COOPERATION  AGAINST  CRIMES  THAT  HARM  BOTH  COUNTRIES  -- 
AND  OTHER  PARTS  OF  THE  WORLD  AS  WELL.   THAT  IS  THE  REASON  THE  FBI 
HAS  OPENED  A  LEGAL  ATTACHE  OFFICE  IN  MOSCOW  TO  WORK  CLOSELY  WITH 
RUSSIAN  POLICE  AGAINST  A  VARIETY  OF  COSTLY  CRIMES.   FROM  JUI.Y, 
1994  TO  THE  PRESENT,  THE  NUMBER  OF  CASES  WORKED  BY  THE  FBI  AGENTS 
IN  MOSCOW  HAS  INCREASED  FROM  20  TO  OVER  200. 

IF  CONGRESS  AGREES,  AND  WITH  THE  COOPERATION  OF  THE 
DEPARTMENT  OF  STATE  AND  THE  DEPARTMENT  OF  JUSTICE,  WE  HOPE  TO 
EXPAND  OUR  NETWORK  OF  LEGAL  ATTACHE  OFFICES  AROUND  THE  WORLD. 
THE  GLOBAL  NEEDS  ARE  GREAT  --  AND  MANY  NATIONS,  INCLUDING  RUSSIA, 
ARE  WORKING  DILIGENTLY  TO  FIGHT  CRIME  THAT  HURTS  THE  LAW-ABIDING 
EVERYWHERE . 

ONE  OF  THE  SPECIFIC  ISSUES  OF  GREAT  CONCERN  TO  THE  FBI 
AND  TO  RUSSIAN  AUTHORITIES  IS  THE  THEFT  AND  DIVERSION  OF  NUCLEAR 
MATERIALS  --  AND  THE  POTENTIAL  THEFT  OF  NUCLEAR  WEAPONS  BY 
TERRORISTS  OR  ROGUE  NATIONS. 

OVER  THE  PAST  YEAR,  LEGITIMATE  CONCERNS  HAVE  BEEN 
RAISED  BY  THE  APPARENT  VULNERABILITY  OF  RADIOACTIVE  MATERIALS 


125 


TO  THEFT  OR  DIVERSION  IN  SEVERAL  AREAS  OF  EASTERN  EUROPE  AND 
EURASIA.   THE  SEIZURE  OF  SIGNIFICANT  AMOUNTS  OF  CESIUM  IN 
LITHUANIA  AND  THE  SEIZURE  OF  URANIUM  IN  THE  CZECH  REPUBLIC 
ARE  EXAMPLES  OF  THE  CONCERNS  IN  THE  INTERNATIONAL  COMMUNITY 
REGARDING  THE  THREAT  OF  NUCLEAR  PROLIFERATION. 

THE  RECENT  INCREASES  IN  RADIOLOGICAL -NUCLEAR  MATERIAL 
INCIDENTS  THROUGHOUT  THE  WORLD  HAVE  CAUSED  THE  INTERNATIONAL  LAW 
ENFORCEMENT  COMMUNITY  TO  COMMUNICATE  BETTER  WITH  EACH  OTHER. 

ALTHOUGH  THERE  HAVE  BEEN  NO  SEIZURES  OF  NUCLEAR 
MATERIAL  IN  THE  UNITED  STATES,  TWO  RECENT  CASES  INVOLVED 
CONSPIRACIES  TO  IMPORT  RADIOACTIVE  MATERIAL  INTO  THIS  COUNTRY. 
IN  NEW  YORK,  THE  UNITED  STATES  CUSTOMS  SERVICE  ARRESTED  FOREIGN 
NATIONALS  ATTEMPTING  TO  NEGOTIATE  THE  SALE  OF  RADIOACTIVE 
ZIRCONIUM  METAL  INTO  THE  UNITED  STATES  ULTIMATELY,  45  TONS  OF  THE 
MATERIAL  WERE  SEIZED  IN  CYPRUS,  ENROUTE  TO  THE  UNITED  STATES 
IN  THE  OTHER  CASE,  THE  CANADIAN  CUSTOMS  SERVICE  INTERCEPTED 
RADIOACTIVE  ISOTOPES  ORIGINATING  IN  RUSSIA  BEING  SMUGGLED  INTO 
THE  UNITED  STATES  THROUGH  CANADA.   THE  FBI  ASSISTED  THE  CANADIAN 
LAW  ENFORCEMENT  AGENCIES  IN  THEIR  INVESTIGATION. 

WHILE  SOME  CRIME  PROBLEMS  FLOW  FROM  EAST  TO  WEST, 
OTHERS  FLOW  BACK  FROM  WEST  TO  EAST.  ONE  OF  THE  MOST  DIFFICULT 
LAW  ENFORCEMENT  PROBLEMS  FACING  MANY  OF  THE  NEWLY -FREED  AND 
EASTERN  EUROPEAN  NATIONS  IS  DRUG  TRAFFICKING.  THE  SCOURGE  OF 
DRUG  TRAFFICKING  HAS  HAD  A  DEVASTATING  IMPACT  ON  THE  ENTIRE 
GLOBAL  COMMUNITY.  RUSSIA,  THE  NEWLY  INDEPENDENT  STATES  AND 
EASTERN  EUROPE  ARE  CERTAINLY  NOT  IMMUNE  TO  THIS  EPIDEMIC. 


25-049  0-96-5 


126 


CRIMINAL  ORGANIZATIONS  IN  THESE  EMERGING  DEMOCRACIES  ARE  TAKING 
ADVANTAGE  OF  THE  RELAXED  BORDERS  AND  IMPROVED  TELECOMMUNICATIONS 
SYSTEMS  THAT  HAVE  EMERGED  IN  RECENT  YEARS  TO  FACILITATE  THEIR 
ILLEGITIMATE  OPERATIONS.   THESE  COUNTRIES  ARE  TARGETS  OF 
OPPORTUNITY  FOR  "^HE  MAJOR  DRUG  TRAFFICKING  ORGANIZATIONS,  LIKE 
THE  COLOMBIAN  CARTELS,  WHICH  SEEK  TO  ESTABLISH  NEW  AND  LUCRATIVE 
MARKETS. 

IWTBRKATIONAL  TRAINING 

THE  FBI'S  INTERNATIONAL  APPROACH  IN  COMBATING  RUSSIAN 
AND  OTHER  INTERNATIONAL  ORGANIZED  CRIME  GROUPS  INCLUDES  GENERAL 
AND  SPECIALIZED  LAW  ENFORCEMENT  TRAINING  FOR  FOREIGN  LAW 
ENFORCEMENT  AGENCIES.  DURING  FISCAL  YEAR  (FY)  1995,  THE  FBI 
TRAINED  4,400  FOREIGN  LAW  ENFORCEMENT  PERSONNEL.  THIS  TRAINING 
IS  PARTICULARLY  CRITICAL  WITH  RESPECT  TO  THE  POLICE  AGENCIES, OF 
SOME  OF  THE  NEWLY -EMERGING  DEMOCRACIES. 

MOST  OF  THIS  TRAINING  IS  ACCOMPLISHED  BY  FUNDING 
GENEROUSLY  MADE  AVAILABLE  BY  CONGRESS  TO  THE  DEPARTMENT  OF  STATE 
THROUGH  THE  FREEDOM  SUPPORT  ACT  (FSA)  AND  SUPPORT  FOR  EASTERN 
EUROPEAN  DEMOCRACIES  (SEED)  FUNDING.   THE  FBI  AND  THE  DEPARTMENT 
OF  STATE,  WORKING  TOGETHER,  ARE  ALSO  RESPONSIBLE  FOR  THE 
INTERNATIONAL  LAW  ENFORCEMENT  TRAINING  ACADEMY  IN  BUDAPEST,  WHICH 
FUNCTIONS  AS  THE  CENTER  FOR  LAW  ENFORCEMENT  TRAINING  FOR  OFFICERS 
FROM  MANY  EASTERN  EUROPEAN,  RUSSIAN  AND  EURASIAN  NATIONS. 

THE  ACADEMY  AT  BUDAPEST  PROVIDES  AN  EIGHT-WEEK 
PROFESSIONAL  DEVELOPMENT  PROGRAM  SIMILAR  TO  OUR  FBI  NATIONAL 


127 


ACADEMY  PROGRAM  AT  QUANTICO.   DURING  FY  1995,  A  TOTAL  OF  THREE 
CLASSES  GRADUATED  FROM  THE  BUDAPEST  ACADEMY  --  EACH  OF  33  MID- 
LEVEL  POLICE  OFFICERS.   THOSE  OFFICERS  CAME  FROM  THE  CZECH 
REPUBLIC,  HUNGARY,  LATVIA,  POLAND,  ROMANIA,  SLOVAKIA,  ESTONIA, 
AND  LITHUANIA. 

FOR  FY  1996,  THE  SCHEDULE  IS  MUCH  MORE  AGGRESSIVE, 
CALLING  FOR  APPROXIMATELY  200  PERSONS  TO  BE  TRAINED  FROM  THE 
FOLLOWING  COUNTRIES:  ALBANIA,  BELARUS,  BULGARIA,  CROATIA, 
ESTONIA,  HUNGARY,  KAZAKHSTAN,  KYRGYZSTAN,  LATVIA,  MACEDONIA, 
MOLDOVA,  POLAND,  RUSSIA,  SLOVENIA,  AND  UKRAINE. 

WE  CAN  BE  IMMENSELY. PROUD  OF  THE  ACADEMY  AT  BUDAPEST. 
IT  IS  A  DIRECT  OUTGROWTH  OF  DIRECTOR  FREEH'S  TRIP  TO  EASTERN 
EUROPE  IN  1994  AND  PRESIDENT  CLINTON'S  DIRECTION  TO  UNITED  STATES 
GOVERNMENT  AGENCIES  TO  JOIN  TOGETHER  TO  BUILD  THE  WORLD'S 
CAPABILITIES  IN  FIGHTING  INTERNATIONAL  CRIME.   THE  ACADEMY 
REPRESENTS  THE  COMBINED  EFFORTS  OF  THE  DEPARTMENT  OF  STATE  (DOS) , 
THE  DEPARTMENT  OF  JUSTICE  (DOJ) ,  THE  FBI,  THE  DRUG  ENFORCEMENT 
ADMINISTRATION  (DEA) ,  THE  INTERNAL  REVENUE  SERVICE  (IRS),  THE 
UNITED  STATES  SECRET  SERVICE  (USSS) ,  THE  FEDERAL  LAW  ENFORCEMENT 
TRAINING  CENTER  (FLETC) ,  THE  ALCOHOL  TOBACCO  AND  FIREARMS  (ATF) , 
AND  OTHER  AGENCIES  AND  COUNTRIES.   IT  IS  TRULY  A  CASE  WHERE  ALL 
OF  THESE  LAW  ENFORCEMENT  AGENCIES  ARE  WORKING  TOGETHER  AS 
PARTNERS  TOWARD  A  COMMON  GOAL.   I  CANNOT  SPEAK  HIGHLY  ENOUGH 
ABOUT  THE  CONTRIBUTIONS  DEA,  SECRET  SERVICE,  IRS,  ATF  AND  THE 
FEDERAL  LAW  ENFORCEMENT  TRAINING  CENTER  IN  THE  DEPARTMENT  OF 
TREASURY  HAVE  MADE  IN  MAKING  THE  ACADEMY  SUCCEED.   THE  ACADEMY 

8 


128 


BRINGS  TOGETHER  SEASONED  INVESTIGATORS  AS  INSTRUCTORS  AND  LAW 
ENFORCEMENT  OFFICERS  FROM  ACROSS  EASTERN  EUROPE,  RUSSIA,  AND  THE 
NEWLY  INDEPENDENT  STATES  TO  LEARN  POLICING  UNDER  THE  RULE  OF  LAW. 
WE  ARE  ESPECIALLY  GRATEFUL  TO  OUR  HOST  COUNTRY,  HUNGARY. 

ON  APRIL  22,1996,  ATTORNEY  GENERAL  RENO  AND  DIRECTOR 
FREEH,  ALONG  WITH  HIS  OTHER  COUNTERPARTS  FROM  THE  UNITED  STATES 
WERE  HONORED  TO  ATTEND  THE  DEDICATION  OF  THE  INTERNATIONAL  LAW 
ENFORCEMENT  ACADEMY.   WITH  THE  RECENT  COMPLETION  OF  RENOVATIONS, 
THE  CAPACITY  OF  THE  ACADEMY  HAS  BEEN  EXPANDED.   THE  DEDICATION 
WAS  AN  HISTORIC  MOMENT  IN  INTERNATIONAL  LAW  ENFORCEMENT. 

THE  FBI  ALSO  IS  INVOLVED  IN  FOREIGN  POLICE  TRAINING 
IN  MANY  OTHER  VALUABLE  WAYS.   FOR  EXAMPLE,  IN  FY  1995, 
THE  FBI  PERFORMED  A  TOTAL  OF  10  IN-COUNTRY  TRAINING  NEEDS 
ASSESSMENTS.   IT  WORKS  THIS  WAY:   AT  THE  INVITATION  OF  THE 
HOST  GOVERNMENT,  WE  ANALYZE  THAT  COUNTRY'S  POLICE  TRAINING  NEEDS 
AND  CAPABILITIES.   WE  THEN  MAKE  A  RECOMMENDATION  OF  HOW  WE 
BELIEVE  WE  CAN  BEST  ASSIST  THE  HOST  COUNTRY'S  LAW  ENFORCEMENT 
CAPABILITIES  THROUGH  SPECIFICALLY  TARGETED  TRAINING."  THE 
ASSESSMENTS  WERE  CONDUCTED  IN  ALBANIA,  BELARUS,  BULGARIA, 
ESTONIA,  INDIA,  KAZAKHSTAN,  KYRGYSTAN,  LATVIA,  LITHUANIA, 
MOLDOVA,  PARAGUAY,  PERU,  POLAND,  ROMANIA,  TUNISIA,  UKRAINE,  AND 
URUGUAY . 

THROUGH  THE  FBI'S  IN -COUNTRY  TRAINING  PROGRAM,  THE  FBI 
CONDUCTS  ONE  AND  TWO-WEEK  SCHOOLS  IN  FOREIGN  NATIONS  WHICH 
CONCENTRATE  ON  POLICE  OPERATIONS  AND  TECHNICAL  SKILLS.   WE 
USE  SEASONED,  SENIOR  FBI  STREET  AGENT  INSTRUCTORS  WHO  USE 


129 


THEIR  EXTENSIVE  PRACTICAL  EXPERIENCE  IN  TRAINING  OUR  FOREIGN 
COUNTERPARTS  IN  POLICING  UNDER  THE  RULE  OF  LAW.   THE  INSTRUCTORS 
IN  THESE  PROGRAMS  HAVE  AN  ESTABLISHED  EXPERTISE  IN  CRIMINAL 
INVESTIGATIONS,  ESPECIALLY  ORGANIZED  CRIME  AND  WHITE  COLLAR 
CRIME.   THEIR  CREDIBILITY  IS  NOT  ONLY  ESSENTIAL  FOR  EFFECTIVE 
INSTRUCTION  BUT  ALSO  IS  VERY  EFFECTIVE  IN  BUILDING  THE  COP-TO-COP 
BRIDGES  THAT  WE  SO  CRITICALLY  NEED. 

SINCE  THE  FIRST  OF  THE  YEAR,  WE  HAVE  TRAINED  212 
OFFICERS  OF  THE  MINISTRY  OF  INTERIOR  FOR  THE  RUSSIAN  FEDERATION 
(MVD)  IN  SEMINARS  HELD  IN  RUSSIA  AND  AT  THE  FBI  ACADEMY  IN 
QUANTICO.   ALONG  WITH  THE  INSTRUCTION  GEARED  TO  THE  INVESTIGATION 
OF  CRIMES,  WE  HAVE  PROVIDED  TRAINING  IN  ETHICS  AND  INTERNAL 
POLICE  CONTROLS  --  THE  FIRST  TIME  THAT  THIS  HAS  EVER  BEEN  DONE 
AND  AN  AREA  WHICH  IS  CRITICAL  TO  THE  SUCCESS  OF  POLICING  UNDER 
THE  RULE  OF  LAW. 

OUR  IN-COUNTRY  TRAINING  PROGRAMS  ARE  PRIMARILY  FUNDED 
THROUGH  THE  FSA  AND  SEED  FUNDS  WE  RECEIVE  FROM  THE  DEPARTMENT  OF 
STATE.   THE  FBI,  ALONG  WITH  OTHER  LAW  ENFORCEMENT  AGENCIES, 
SUBMIT  PROPOSED  INTERNATIONAL  TRAINING  PLANS  TO  THE  DEPARTMENT  OF 
STATE  AT  THE  BEGINNING  OF  THE  FISCAL  YEAR.   DEPENDING  ON  THE 
FUNDING  THAT  IS  AVAILABLE  FOR  LAW  ENFORCEMENT  TRAINING,  THE 
DEPARTMENT  OF  STATE  THEN  DETERMINES  THE  FUNDING  AMOUNTS  FOR  EACH 
AGENCY . 

DURING  THE  PAST  TWO  YEARS,  THE  FBI  HAS  RECEIVED  $8.3 
MILLION  OF  THESE  FUNDS  FOR  OUR  TRAINING  INITIATIVE.   WE  HAVE 
BEEN  VERY  PLEASED  WITH  THE  SUPPORT  WE  HAVE  RECEIVED  FROM  THE 

10 


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DEPARTMENT  OF  STATE  --  ALL  THE  TRAINING  WE  HAVE  PROPOSED  HAS  BEEN 
FUNDED.   IN  ADDITION,  THE  FBI  HAS  USED  $300,000  OF  ITS 
APPROPRIATED  FUNDING  TO  PROVIDE  LIMITED  TRAINING  TO  LAW 
ENFORCEMENT  IN  OTHER  COUNTRIES. 

IN  FY  1995,  THE  FBI  PROVIDED  FSA  AND  SEED  SUPPORTED 
TRAINING  SEMINARS  TO  OVER  1,800  LAW  ENFORCEMENT  OFFICERS  FROM 
HUNGARY,  POLAND,  SLOVAKIA,  CZECH  REPUBLIC,  ESTONIA,  LATVIA, 
LITHUANIA,  UKRAINE,  RUSSIA,  ROMANIA,  AND  MOLDOVA.   IN  FY  1996, 
WE  WILL  EXPAND  OUR  TRAINING  INTO  BELARUS,  SLOVENIA,  KAZAKHSTAN, 
KYRGYSTAN,  BULGARIA,  AND  ALBANIA.   THE  TRAINING  PROVIDED  IS 
TAILORED  TO  MEET  THE  NEEDS  OF  THE  PARTICIPANTS.   TOPICS  ADDRESSED 
INCLUDE  BANK  ROBBERY,  DRUG  TRAFFICKING,  KIDNAPPING,  FINANCIAL 
CRIMES,  WHITE-COLLAR  CRIME,  ORGANIZED  CRIME  AND  TERRORISM.   JUST 
RECENTLY,  FOR  EXAMPLE,  WE  CONDUCTED  A  WHITE-COLLAR  CRIME  AND 
CORRUPTION  SEMINAR  IN  KAZAKHSTAN.   ALL  OF  THIS  TRAINING  HAS  A 
DIRECT  IMPACT  ON  UNITED  STATES  PERSONS  AND  CORPORATIONS  WHO  HAVE 
FLOCKED  TO  THESE  COUNTRIES  IN  SEARCH  OF  BUSINESS  OPPORTUNITIES. 

IN  ADDITION  TO  THE  TRAINING  FUNDED  BY  THE  FSA  AND  SEED 
ACTS,  THE  FBI  TRAINED  AN  ADDITIONAL  2,600  STUDENTS  THROUGH  OUR 
OTHER  PROGRAMS.   THESE  PROGRAMS  INCLUDED  THE  CRIME-SPECIFIC 
INVESTIGATIVE  SEMINARS,  TARGETED  CRIME  SCENE  ANALYSIS  TRAINING 
AS  PROVIDED  BY  OUR  FORENSIC  EXPERTS,  AND  MANAGEMENT  TRAINING 
FOR  MID- LEVEL  AND  EXECUTIVE  LAW  ENFORCEMENT  OFFICERS.   LAST  YEAR, 
110  INTERNATIONAL  OFFICERS  ALSO  PARTICIPATED  IN  THE  FBI  NATIONAL 
ACADEMY  PROGRAM  AT  QUANT I CO.   THEIR  PARTICIPATION  ALLOWS  AN 
ADDITIONAL  "BRIDGE"  TO  BE  BUILT  FROM  OUR  STATE  AND  LOCAL  OFFICERS 


131 


TO  THOSE  OVERSEAS. 

ONE  BENEFICIAL  PART  OF  THIS  TRAINING  IS  THE  OPPORTUNITY 
IT  PROVIDES  THE  TRAINERS  AND  THE  TRAINEES  TO  INTERACT  ABOUT 
SPECIFIC  CRIME  PROBLEMS  BEING  ENCOUNTERED  IN  THEIR  COUNTRIES,  HOW 
TO  ADDRESS  THE  PROBLEM,  SHARE  EXPERIENCES  LEARNED  IN  THE  PROCESS 
AND  FORGE  NEW  RELATIONSHIPS  FOR  FUTURE  COOPERATION  ON  MATTERS  OF 
MUTUAL  INTEREST  AND  CONCERN.   IN  SOME  OF  OUR  INVESTIGATIONS,  THE 
FBI  HAS  BENEFITTED  BY  BRINGING  ACTUAL  CASE  INVESTIGATORS  TO  THE 
UNITED  STATES  FROM  OTHER  NATIONS  TO  WORK  SIDE  BY  SIDE  WITH  FBI 
AGENTS . 

THIS  IS  A  CONTINUATION  OF  THE  TRAINING  WE  HAVE  PROVIDED  AND 
ALLOWS  "HANDS-ON"  APPLICATION  AND  OBSERVATION  OF  INVESTIGATIVE 
TECHNIQUES  SUCCESSFULLY  EMPLOYED  BY  THE  FBI  IN  OUR  ORGANIZED 
CRIME  INVESTIGATIONS. 

AS  EXAMPLES  OF  THE  SUCCESSES  THE  FBI  HAS  SEEN  FROM 
CONTACTS  AND  LIAISON  ESTABLISHED  AS  A  RESULT  OF  THIS  TRAINING,  A 
CENTRAL  EUROPEAN  WORKING  GROUP  ON  INTERNATIONAL  ORGANIZED  CRIME 
WAS  ESTABLISHED  THIS  PAST  YEAR  AND  A  SIX-NATION  WORKING  GROUP  ON 
INTERNATIONAL  ORGANIZED  CRIME  GREW  OUT  OF  THE  GERMAN -AMERICAN 
WORKING  GROUP.  IN  ADDITION  TO  THE  FBI,  THEY  BRING  TOGETHER  LAW 
ENFORCEMENT  AGENCIES  FROM  EASTERN  AND  WESTERN  EUROPE,  THE  MIDDLE 
EAST  AND  CANADA  TO  DISCUSS  SPECIFIC  ORGANIZED  CRIME  THREATS 
COMMON  TO  ALL  COUNTRIES  REPRESENTED.   LINES  OF  COMMUNICATION  AND 
WORKING  RELATIONSHIPS  ARE  NOW  ESTABLISHED  AND  PRACTICAL  LAW 
ENFORCEMENT  APPROACHES  TO  THE  ORGANIZED  CRIME  PROBLEMS  OF  THE 
REGIONS  ARE  PLANNED.   AS  A  DIRECT  RESULT  OF  THIS  INITIATIVE, 

12 


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SEVERAL  COUNTRIES  WERE,  FOR  THE  FIRST  TIME,  ABLE  TO  ESTABLISH 
CONTINUING  LIAISON  COMMUNICATIONS  WITH  OTHER  REPRESENTED 
ORGANIZATIONS  ON  A  DIRECT  PROFESSIONAL  LEVEL  AND  TO  INITIATE 
JOINT  INVESTIGATIONS. 

FOR  EXAMPLE,  A  MULTI-NATIONAL,  CASE-SPECIFIC  FRAUD 
SEMINAR  WAS  CONDUCTED  BY  THE  FBI'S  FINANCIAL  CRIMES  SECTION  FROM 
FEBRUARY  18-22,  1996,  IN  BERLIN,  GERMANY.   THE  PROGRAM  DEALT  WITH 
BANK  FAILURES  AITO  BROUGHT  TOGETHER  INVESTIGATORS  FROM  THE  UNITED 
STATES,  LATVIA,  NETHERLANDS,  RUSSIA,  AND  GERMANY  FOR  A  PRACTICAL 
CASE  TRAINING  INITIATIVE. 

THE  RESULTING  PRODUCT  OF  THESE  CONSTRUCTIVE  MEETINGS  IS 
AN  INVESTIGATIVE  ORGANIZED  CRIME  TASK  FORCE,  INTERNATIONAL  IN 
SCOPE,  THAT  IS  TARGETING  SIGNIFICANT  CRIMINAL  ORGANIZATIONS 
DETERMINED  TO  BE  A  MAJOR  THREAT  TO  MANY  NATIONS,  INCLUDING  THE 
UNITED  STATES. 

THE  FBI  ALSO  PRESENTED  A  NUCLEAR  NON-PROLIFERATION 
CONFERENCE  AT  THE  FBI  COMPLEX  AT  QUANTICO,  VIRGINIA  FROM 
APRIL  18-21,  1995,  AND  TWENTY-EIGHT  (28)  SEED  AND  FSA  NATIONS 
SENT  REPRESENTATIVES,  INCLUDING,  AMONG  OTHERS,  RUSSIA  AND 
UKRAINE.   THE  CONFERENCE  OUTLINED  THE  PROBLEMS  OF  NUCLEAR 
MATERIALS  AND  WEAPONS  PROLIFERATION  FROM  THE  COUNTRIES  OF  THE 
FORMER  SOVIET  UNION  AND  COUNTER- PROLIFERATION  PROPOSALS  AND 
TRAINING  INITIATIVES.   THE  CONFERENCE  IS  INCLUDED  AS  A  FSA 
INITIATIVE  TO  ADDRESS  THIS  SERIOUS  PROBLEM. 

THE  DEPARTMENT  OF  DEFENSE  AND  THE  FBI  ARE  CURRENTLY  IN 
THE  FINAL  STAGES  OF  SUBMITTING  THE  DOD/FBI  COUNTERPROLIFERATION 

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PROGRAM  REPORT  TO  CONGRESS  REGARDING  PLANS  TO  PROVIDE 
INTERNATIONAL  TRAINING  SEMINARS  ON  NUCLEAR  SMUGGLING.   THIS  IS 
PART  OF  OUR  NUNN-LUGAR  FUNDED  INTERNATIONAL  TRAINING  SEMINARS 
PROGRAM  ON  NUCLEAR  SMUGGLING. 

THE  FBI'S  NUCLEAR  BIOLOGICAL  CHErilCAL  PROLIFERATION 
UNIT  IS  PRESENTLY  IN  POSSESSION  OF  A  REPORT  COMPILED  BY  AN  FBI 
TEAM  THAT  RECENTLY  CONDUCTED  A  TRAINING  ASSESSMENT  IN  THE  CZECH 
REPUBLIC.   DURING  THIS  ASSESSMENT,  WHICH  WAS  COORDINATED  BY  OUR 
LEGAL  ATTACHE  IN  VIENNA,  THE  FBI  REPRESENTATIVES  FROM  THE 
INTERNATIONAL  COORDINATION  UNIT,  THE  FBI  LABORATORY  AND  THE 
ENGINEERING  SECTION,  MET  WITH  VARIOUS  CZECH  LAW  ENFORCEMENT 
AGENCIES,  CZECH  NUCLEAR  SAFETY  OFFICIALS,  AND  FACULTY  MEMBERS  OF 
THE  REZ  INSTITUTE. 

THIS  ASSESSMENT  YIELDED  VALUABLE  INFORMATION  REGARDING 
THE  CONCERNS  AND  NEEDS  OF  THE  ATTENDING  CZECH  OFFICIALS.  IT  IS 
PROPOSED  THAT  THE  INFORMATION  PROVIDED  BY  THE  CZECHS,  WITH  REGARD 
TO  THEIR  SPECIFIC  REQUIREMENTS,  WILL  RESULT  IN  ESTABLISHING  A 
TRAINING  PROTOTYPE  FOR  OTHER  COUNTRIES  REQUESTING  SUPPORT  IN 
COUNTERPROLIFERATION  MATTERS. 

INTERAGENCY  WORKING  GROUP 

AS  YOU  MAY  BE  AWARE,  THE  CONGRESS  ESTABLISHED  THE 
INTERAGENCY  WORKING  GROUP  (IWG)  TO  MAKE  RECOMMENDATIONS  AS  TO 
TRAINING  AND  OTHER  SUPPORT  RECEIVED  BY  RUSSIA,  THE  NEWLY 
INDEPENDENT  STATES,  ANOTHER  EASTERN  EUROPEAN  COUNTRIES.   THIS  HAS 


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BEEN  A  SUCCESSFUL  ENDEAVOR  THAT  GREATLY  ASSISTS  US  IN  THE  PROPER 
COORDINATION  OF  OUR  TRAINING  EFFORTS  ABROAD. 

THE  IWG  ALLOWS  ALL  FEDERAL  LAW  ENFORCEMENT  AGENCIES  TO 
PARTICIPATE  IN  DEPARTMENT  OF  STATE  FSA  AND  SEED  FUNDED  TRAINING 
INITIATIVES  WITHIN  THE  FORMER  SOVIET  UNION  AND  BLOC  NATIONS, 
BASED  ON  THEIR  RESPECTIVE  LAW  ENFORCEMENT  JURISDICTION. 
PARTICIPATION  IN  THE  IWG  PREVENTS  DUPLICATION  AND  WASTE  OF 
RESOURCES.   IWG  PRIORITIES  ARE  FORMULATED  BY  THE  DEPARTMENTS  OF 
STATE,  JUSTICE  AND  THE  TREASURY,  AS  DICTATED  BY  THE  VARIOUS  LAW 
ENFORCEMENT  ENTITIES  FROM  THOSE  DEPARTMENTS,  PARTICIPATING  ON  THE 
IWG. 

THE  FBI  PARTICIPATES  AS  A  MEMBER  OF  THE  IWG  IN  CARRYING 
OUT  THE  PROGRAMS  UNDER  THE  AUSPICES  OF  THE  FSA  AND  SEED.   LET  ME 
DESCRIBE  THE  FBI'S  ROLE: 

*  THE  FBI,  AS  THE  AGENCY  WITH  THE  BROADEST  FEDERAL  LAW 
ENFORCEMENT  RESPONSIBILITY,  CONDUCTED  A  MAJOR  PORTION  OF  THE 
TRAINING  AND  TECHNICAL  ASSISTANCE  DURING  FY  1995,  WITH  A  SIMILAR 

•SCHEDULE  PLANNED  FOR  FY  1996 . 

*  THE  FBI  HAS  EXCLUSIVE  TRAINING  IN  THE  AREA  OF  ORGANIZED 
CRIME.   OTHER  PARTICIPATING  AGENCIES  LIKE  THE  DRUG  ENFORCEMENT 
ADMINISTRATION  AND  THE  BUREAU  OF  ALCOHOL,  TOBACCO,  AND  FIREARMS, 
LIKEWISE  HAVE  EXCLUSIVE  AREAS  OF  TRAINING  BASED  ON  THEIR 
EXPERTISE  AND  JURISDICTION. 

*  IN  OTHER  AREAS,  SUCH  AS  ECONOMIC  CRIMES,  TRAINING 
BY  THE  UNITED  STATES  SECRET  SERVICE,  U.S.  CUSTOMS  SERVICE, 
FINCEN,  AND  DEA  COMPLIMENTS  THAT  DONE  BY  THE  FBI. 

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LEGAL  ATTACHE  PROGRAM 

THE  FBI'S  LEGAL  ATTACHE  PROGRAM  IS  THE  SINGLE  MOST 
SIGNIFICANT  FACTOR  IN  THE  BUREAU'S  ABILITY  TO  DETECT,  DETER,  AND 
INVESTIGATE  INTERNATIONAL  CRIMES  IN  WHICH  THE  UNITED  STATES  OR 
OUR  CITIZENS  ARE  THE  VICTIMS.   BY  STATIONING  AGENTS  ABROAD  AND 
ESTABLISHING  OPERATIONAL  LINKS  WITH  FOREIGN  POLICE,  THE  FBI 
SUBSTANTIALLY  EXPANDS  THE  NATION'S  PERIMETER  OF  LAW  ENFORCEMENT 
PROTECTION.   GENEROUSLY  FUNDED  OUT  OF  THE  COMMERCE,  STATE,  AND 
JUSTICE  BILL,  THE  FBI'S  LEGAL  ATTACHES  ARE  TRULY  OUR  FIRST  LINE 
OF  DEFENSE. 

INTERNATIONAL  CRIME  HAS  GROWN  ENORMOUSLY  IN  RECENT 
YEARS.   TECHNOLOGICAL  ADVANCES  AND  THE  END  OF  THE  COLD  WAR 
PROMPTED  DRAMATIC  INCREASES  IN  GLOBAL  TRAVEL  AND 

TELECOMMUNICATIONS.   CRIMINALS  HAVE  USED  THESE  CHANGES  TO  THEIR 
ADVANTAGE,  DIFFUSING  THEIR  OPERATIONS  AROUND  THE  WORLD  TO  AVOID 
LAW  ENFORCEMENT  SCRUTINY.   THE  RELENTLESS  GLOBALIZATION  OF  CRIME 
THREATENS  AMERICA  BOTH  AT  HOME  AND  ABROAD  --  AND  ALL  OTHER 
LAW-ABIDING  NATIONS  AS  WELL.   FOR  BETTER  OR  FOR  WORSE,  THE 
GLOBAL  VILLAGE  IS  NOW  A  LATE-20TH  CENTURY  REALITY. 

OUR  EXPERIENCE  SHOWS  THAT  PLACING  FBI  AGENTS  AT 
CRITICAL  POSTS  ABROAD  PROVIDES  THE  MOST  RELIABLE,  EFFECTIVE  AND 
TIMELY  MEANS  TO  COMBAT  INTERNATIONAL  CRIME  --  AND  OFTEN  AT  THE 
SOURCE.   IT  IS  ESSENTIAL  TO  STATION  HIGHLY-SKILLED  AGENTS  IN 
OTHER  COUNTRIES  TO  PREVENT  FOREIGN  TERRORISM  AND  FOREIGN  CRIME 
FROM  REACHING  THE  UNITED  STATES. 

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AT  PRESENT,  THE  FBI  HAS  IN  PLACE  IN  OUR  LEGAL  ATTACHE 
OFFICES  70  SENIOR  AGENTS  AND  54  SUPPORT  PERSONNEL  IN  2  3  NATIONS 
AROUND  THE  WORLD,  FUNDED  OUT  OF  FBI  OPERATIONAL  FUNDS.   DURING 
FY  1995,  THESE  OFFICES  HANDLED  OVER  11,200  MATTERS.   THEY  ARE  THE 
CONDUIT  THROUGH  WHICH  LAW  ENFORCEMENT  INFORMATION  AND  COOPERATION 
FLOWS  BETWEEN  THE  UNITED  STATES  AND  ITS  FOREIGN  PARTNERS.   THEIR 
GOAL  CAN  BE  DEFINED  SUCCINCTLY:   TO  KEEP  FOREIGN  CRIME  AS  FAR 
FROM  AMERICAN  SHORES  AS  POSSIBLE,  TO  KEEP  FOREIGN  CRIME 
PERMANENTLY  AT  BAY  WHENEVER  POSSIBLE,  TO  HELP  COMBAT  MORE 
EFFECTIVELY  THOSE  CRIMES  THAT  DO  REACH  OUR  BORDERS.   THE  WHOLE 
POINT  IS  TO  PROTECT  THE  AMERICAN  PEOPLE  FROM  HARM. 

FBI  AGENTS  STATIONED  OVERSEAS  ARE  NOT  INTELLIGENCE 
OFFICERS;  THEY  ARE  NOT  A  SHADOW  INTELLIGENCE  AGENCY;  AND  THEY 
DO  NOT  ENGAGE  IN  ESPIONAGE.   THEY  ARE  LAW  ENFORCEMENT  AGENTS- - 
DEDICATED  TO  FIGHTING  ORGANIZED  CRIME,  TERRORISM,  NUCLEAR 
SMUGGLING,  VIOLENT  CRIME,  DRUG  TRAFFICKING,  AND  ECONOMIC  CRIME. 

LET  ME  GIVE  A  FEW  EXAMPLES  OF  THE  DIRECT  BENEFITS  MADE 
POSSIBLE  BECAUSE  OUR  AGENTS  ARE  OVERSEAS  AND  HAVE  THE  COP-TO-COP 
RELATIONSHIPS  WITH  HOST  AUTHORITIES  CRITICAL  TO  EFFECTIVE  LAW 
ENFORCEMENT . 

*     IN  A  MAJOR  MOVE  AGAINST  A  GROWING  RUSSIAN  ORGANIZED 

CRIME  STRUCTURE  IN  THE  UNITED  STATES,  THE  FBI  LAST  YEAR 
ARRESTED  VYACHESLAV  KIRILLOVICH  IVANKOV,  ALLEGEDLY  ONE 
OF  THE  MOST  POWERFUL  RUSSIAN  CRIME  LEADERS  IN  THIS 
COUNTRY,  ALONG  WITH  FIVE  OF  HIS  ASSOCIATES  ON  FEDERAL 

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CHARGES  OF  CONSPIRACY  TO  COMMIT  EXTORTION.   THE  ARRESTS 
IN  NEW  YORK  FOLLOWED  AN  INTENSIVE  FBI  INVESTIGATION 
THAT  WAS  AIDED  GREATLY  BY  THE  RUSSIAN  MINISTRY  OF 
INTERIOR  AND  THE  ROYAL  CANADIAN  MOUNTED  POLICE  AND 
MADE  POSSIBLE  BECAUSE  OF  OUR  LEGAL  ATTACHES  AND  THE 
RELATIONSHIPS  THAT  HAVE  FLOWED  FROM  COOPERATION  ABROAD. 
THE  ARREST  WAS  BASED  UPON  FEDERAL  ARREST  WARRANTS  WHICH 
CHARGE  A  TOTAL  OF  NINE  INDIVIDUALS.   ACCORDING  TO 
RUSSIAN  LAW  ENFORCEMENT  AUTHORITIES,  IVANKOV  FORMED  A 
SUBSTANTIAL  CRIMINAL  ORGANIZATION  IN  RUSSIA  BEFORE  HE 
ENTERED  THE  UNITED  STATES  ALLEGEDLY  TO  MANAGE  AND 
CONTROL  RUSSIAN  ORGANIZED  CRIME  ACTIVITIES  IN  THIS 
COUNTRY.   RUSSIAN  ORGANIZED  CRIME  GROUPS  USE  BUSINESSES 
IN  THE  FORMER  SOVIET  UNION,  WESTERN  AND  CENTRAL  EUROPE, 
AND  THE  UNITED  STATES  TO  SERVE  AS  FRONTS  FOR  LAUNDERING 
THE  PROCEEDS  OF  ILLEGAL  ACTIVITIES  AND  FOR  CONDUCTING 
HIGHLY  PROFITABLE  COMMERCE  IN  GOODS  IN  THE  SUCCESSOR 
STATES  OF  THE  SOVIET  UNION,  KNOWN  AS  THE  COMMONWEALTH 
OF  INDEPENDENT  STATES.   IN  NOVEMBER  1994,  SEVERAL  OF 
THE  DEFENDANTS  ALLEGEDLY  BEGAN  TO  EXTORT  SEVERAL 
MILLION  DOLLARS  FROM  AMERICAN  AND  RUSSIAN  BUSINESSES. 
INTELLIGENCE  INFORMATION  WAS  SHARED  ON  A  CONTINUING 
BASIS  AMONG  THE  FBI,  THE  RUSSIAN  MVD  AND  THE  ROYAL 
CANADIAN  MOUNTED  POLICE.   FBI  LEGAT  PARTICIPATION  WAS 
CRITICAL. 


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♦     MOST  RECENTLY,  FOUR  RUSSIANS  WERE  CHARGED  IN  NEW  YORK 
FOR  CONSPIRING  TO  DEFRAUD  24  RUSSIAN  COMPANIES, 
INCLUDING  A  CHARITY  ESTABLISHED  TO  AID  THE  VICTIMS 
OF  THE  CHERNOBYL  NUCLEAR  DISASTER,  OF  APPROXIMATELY 
$10.8  MILLION. 

•  IN  MOSCOW  AS  A  RESULT  OF  A  JOINT  INVESTIGATION  BETWEEN 

THE  FBI  AND  MVD,  EVENGIY  BYCHKOV,  THE  FORMER  MINISTER 
OF  RUSSIAN  PRECIOUS  GEMS  AND  METALS  WAS  REMOVED  FROM 
OFFICE  AND  CHARGED  WITH  VIOLATIONS  OF  RUSSIAN  LAWS. 
ALSO  CHARGED  WITH  BYCHKOV  WAS  ANDRE  KOZLENOK,  THE 
FORMER  OWNER  AND  OPERATOR  OF  GOLDEN  ADA,  A  DIAMOND 
PROCESSING  FACILITY. 

MANY  OTHER  IMPORTANT  CASES  HAVE  BEEN  MADE  POSSIBLE 
ONLY  BECAUSE  THE  FBI  LEGAL  ATTACHES  ARE  ABLE  TO  FREELY  WORK  WITH 
OUR  FOREIGN  COUNTERPARTS  TOWARD  THE  MUTUALLY - SHARED  GOAL  OF 
EFFECTIVE  LAW  ENFORCEMENT  UNDER  THE  RULE  OF  LAW. 

THE  FBI  IS  DEEPLY  GRATEFUL  TO  CONGRESS  FOR  THE 
SUPPORT  AND  CONTRIBUTIONS  FOR  OUR  LEGAL  ATTACHE  PROGRAM.   A 
RELATIVELY  FEW  AGENTS  BEYOND  OUR  BORDERS  MAKE  A  CONTRIBUTION  OUT 
OF  PROPORTION  TO  THEIR  SMALL  NUMBERS  AND  THE  MODEST  AMOUNT  OF 
DOLLARS  SPENT. 

AS  PART  OF  THE  FY  1996  APPROPRIATIONS  PROCESS,  OUR 
APPROPRIATIONS  SUBCOMMITTEES  HAVE  ASKED  US  TO  PREPARE  A  PLAN 
REFLECTING  OUR  ASSESSMENT  OF  BOTH  THE  SHORT  AND  LONG-TERM  LEGAL 

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ATTACHE  EXPANSION  NEEDS.   WE  HAVE  BEEN  WORKING  CLOSELY  WITH  THE 
DEPARTMENTS  OF  JUSTICE  AND  STATE  TO  PROVIDE  CONGRESS  WITH  A 
CAREFULLY  THOUGHT-OUT  PLAN  DESIGNED  TO  BETTER  MEET  THE  CHALLENGES 
WE  FACE  FROM  EXPLODING  INTERNATIONAL  CRIME  AND  TERRORISM.   THIS 
PLAN  --  WHICH  IS  UNDER  FINAL  ADMINISTRATIS'^  REVIEW  --  IS  A 
REALISTIC,  DOWN-TO-EARTH  ASSESSMENT  OF  THE  VAST  CHANGES  THAT  HAVE 
OCCURRED  IN  RECENT  YEARS  IN  THE  WORLD,  ESPECIALLY  IN  EUROPE  WITH 
THE  BREAKUP  OF  THE  FORMER  SOVIET  UNION. 

QUITE  CANDIDLY,  CONGRESS  HAS  TAKEN  PLANNING  FOR  FBI 
LEGAL  ATTACHE  OFFICES  OUT  OF  THE  CHOPPY  ONE -YEAR  CYCLE  AND 
PROMPTED  US  TO  DEVELOP  A  LONG-TERM,  COMPREHENSIVE  RESPONSE  TO  A 
RAPIDLY  CHANGING  AND  WORSENING  INTERNATIONAL  CRIME  SITUATION. 

WE  ARE  GRATEFUL  FOR  THE  SUPPORT  CONGRESS 
HAS  GIVEN  THESE  PROGRAMS.   IN  OUR  VIEW,  THIS  REPRESENTS 
CAPITALIZING  ON  A  RARE  OPPORTUNITY  TO  PROTECT  OUR  CITIZENS  BY 
BEING  BOTH  PREPARED  AND  SUFFICIENTLY  AGGRESSIVE  AS  CRIME  MOVES 
INTO  THE  GLOBAL  ARENA. 

THANK  YOU  VERY  MUCH.  THIS  CONCLUDES  MY  TESTIMONY  FOR 
TODAY . 


20 


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STATEMENT  OF 

EDWARD  L.  FEDEWCO,  Jr. 

DIRECTOR,  NATIONAL  OPERATIONS,  CRIMINAL  INVESTIGATION 

INTERNAL  REVENUE  SERVICE 

BEFORE  THE 
PERMANENT  SUBCOMMITTEE  ON  INVESTIGATIONS 
SENATE  COMMITTEE  ON  GOVERNMENTAL  AFFAIRS 

MAY  15,  1996 


Good  Morning  Mr.  Chairman  and  distinguished  members  of  the  subcommittee. 
I  appreciate  the  opportunity  to  be  here  today  to  discuss  the  internal  Revenue  Service 
Criminal  Investigation  Division's  experience  with  organized  crime  from  the  former 
Soviet  Union  (FSU). 

I  would  like  to  highlight  a  significant  point  that  illustrates  the  impact  of  financial 
investigations  —  AND  the  expertise  of  IRS  Criminal  Investigation  special  agents  -  on 
combating  organized  crime.  Nearly  everyone  has  heard  of  Al  Capone,  but  what  you 
may  not  know  is  that  while  many  federal  and  state  agencies  attempted  to  prosecute 
Capone  for  everything  from  murder  to  bootlegging,  it  took  an  IRS  special  agent  working 
undercover  to  obtain  information  that  allowed  IRS  to  unravel  Capone 's  books  and 
ledgers  and  to  painstakingly  build  an  airtight  case  against  him.  America's  most 
infamous  gangster  was  found  guilty  and  sent  to  prison  for  income  tax  evasion. 


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The  Capone  investigation  was  certainly  not  our  largest  or  most  complex 
investigation;  however,  it  is  a  perfect  example  of  what  we  do.  When  more  conventional 
investigative  techniques  fail,  we  follow  the  money  trail  —  the  proceeds  of  crime 
eventually  lead  to  the  criminal.    IRS  special  agents  have  been  doing  this  for  over  77 
years.  Some  of  the  most  notable  organized  crime  figures  who  could  not  hide  from  the 
reaches  of  the  IRS  were  figures  such  as  one  of  Capone' s  henchmen,  Waxey  Gordon 
who  was  sentenced  in  1932  to  10  years  in  prison  for  tax  evasion;  John  Gotti  who  was 
sentenced  in  1 990  to  life  in  prison  -  among  the  charges  on  which  he  was  convicted  was 
a  Klein  conspiracy,  which  means  he  attempted  to  impede  and  defeat  the  lawful 
collection  of  income  taxes  for  the  years  1984-1989;  Rocco  Infelise,  Chicago's  crime 
boss  who  was  sentenced  in  1 993  to  63  years  in  prison  for  running  a  bookmaking 
operation;  in  February  of  this  year,  Anthony  (Fat  Tony)  Morelli,  who  was  sentenced  to 
20  years  for  his  prominent  role  in  the  Red  Daisy  diesel  fuel  scheme  in  Newark;  and 
Chicago's  74  year  old  mobster  Samuel  Carlisi  who  was  sentenced  in  March  1996  to 
1 51  months  in  prison  for  failure  to  pay  wagering  taxes. 
What  IRS  Does  Best 

Since  our  inception  as  the  law  enforcement  arm  of  the  Internal  Revenue  Service, 
we  have  always  known  that  greed  is  the  powerful  motivation  behind  the  crimes  we 
investigate.  The  crimes  we  investigate,  like  the  greed  itself,  are  found  in  all  strata  of 
our  society.  Whenever  greed  leads  to  crime,  whether  income  tax  evasion  or 
international  money  laundering.  Criminal  Investigation  is  involved.  Our  investigations 
take  us  to  corporate  board  rooms  as  well  as  to  crack  houses.  IRS  Criminal 
Investigation  special  agents  fill  a  unique  niche  in  the  law  enforcement  community,  that 


142 


of  financial  investigators.  The  special  agent's  accounting  and  law  enforcement  skills 
are  essential  qualities  in  conducting  investigations  wfiich  have  led  to  the  conviction  of 
high  profile  criminals  who  commit  increasingly  sophisticated  financial  crimes.  The 
success  of  our  investigations  enhances  voluntary  compliance  by  increasing  confidence 
with  the  federal  tax  system  and  deterring  others  from  engaging  in  similar  conduct. 

Criminal  Investigation  also  cooperates  closely  with  other  government  agencies 
to  investigate  criminal  activity.  The  Bank  Secrecy  Act,  the  Money  Laundering  Control 
Act  and  the  provisions  of  Title  26  of  the  United  States  Code  outline  the  role  and 
responsibilities  of  the  IRS  Criminal  Investigation  Division  in  investigations  that  cross 
agency  boundaries.  Thus,  our  investigations  cover  not  only  white  collar  crime  but  also 
crimes  involving  illegal  industry. 

For  example,  drug  dealers  have  been  going  to  jail  for  years  for  the  illegal 
distribution  of  narcotics;  however,  at  IRS,  we  pursue  drug  dealers  not  for  the  drugs  but 
for  their  unreported  income  and  for  laundering  their  illegal  profits.  By  focusing  our 
investigations  on  the  "kingpins"  of  narcotics,  we  expend  our  scarce  resources  on  the 
high  dollar,  high  impact  investigations  where  the  nation's  taxpayers  will  get  the 
"biggest  bang  for  their  buck."  By  taking  away  the  thing  they  prize  most,  their  money, 
we  are  shutting  down  the  drug  kingpin's  money  laundering  capabilities  and  ultimately 
stopping  the  flow  of  narcotics  onto  our  streets  and  neighborhoods. 
What  IRS  Knows  About  Organized  Crime 

To  combat  organized  crime  one  must  have  a  thorough  understanding  of  the 
criminals  involved.  This  has  been  particularly  true  of  our  efforts  to  combat  motor  fuel 
excise  tax  evasion  schemes  that  have  been  perpetrated  by  organized  crime,  and 


143 


especially  by  organized  crime  from  the  former  Soviet  Union. 

We  have  identified  some  significant  characteristics  of  individuals  involved  in 
these  newly  established  criminal  enterprises. 

•  They  display  a  remarkable  aptitude  for  sophisticated  white  collar  crime.  They 
are  mostly  well  educated,  many  having  advanced  university  degrees  in 
mathematics,  economics  and  the  sciences.  They  are  adept  at  functioning  in  a 
black  market  economy  and  they  are  skilled  at  corrupting  members  of  a  targeted 
industry,  in  this  instance,  fuel  virholesale  distributors  and  retailers. 

•  They  are  ruthless,  employing  threats,  intimidation  and  violence  to  further  their 
aims.  The  Russians  have  a  long  history  of  settling  disputes  in  the  Brighton 
Beach,  New  York  area  by  resorting  to  murder.  Two  of  the  more  infamous  were 
the  1989  slayings  of  Michael  Markowitz  and  Philip  Moskowitz,  two  major  players 
in  many  motor  fuel  bootlegging  schemes.  IRS  agents,  working  in  undercover 
roles,  received  many  threats  during  the  investigation.  Threats  of  violence  were 
delivered  in  person  or  by  phone,  and  in  other  instances  funeral  wreaths  were 
sent  to  our  undercover  offices  inscribed  "Rest  in  Peace."  During  the  motor  fuel 
excise  tax  evasion  investigation  called  "Red  Daisy,"  our  undercover  offices  were 
set  on  fire  and  burned  after  our  undercover  agents  failed  to  heed  warnings  to 
stop  competing  with  mob-controlled  firms. 

•  They  are  highly  adaptable.  They  work  easily  with  various  ethnic  groups  and 
show  a  willingness  to  "cut  others  in"  if  there  is  a  profit  margin  for  them  or  if  it  will 
further  their  enterprises.  For  example,  oil  dealer  Charles  Hurchalla,  of  Exton, 
Pennsylvania,  selflessly  agreed  to  allow  the  government  to  use  his  business  and 


144 


act  as  an  undercover  agent  in  the  $14.8  million  Philadelphia  investigation.    To 
gain  his  cooperation,  the  Russians  presented  him  with  a  gold  Rolex  President 
watch  worth  $15,000  as  a  bonus  or  business  incentive.  During  the  course  of  the 
investigation  the  criminals  suspected  that  Hurchaila  was  acting  as  a  government 
agent,  so  they  summoned  him  to  a  meeting  in  New  York  City  to  confront  him. 
They  ended  up  offering  him  a  more  lucrative  cut  of  the  profits.  Hurchaila 
advised  the  IRS  that  "the  Russians  believe  that  everyone  has  their  price  and 
with  enough  money  almost  anyone,  whether  in  government  or  private  industry, 
can  be  corrupted."    According  to  our  informants,  if  this  approach  does  not  work, 
the  Russians  have  a  "join  up  or  die"  strategy. 

•         They  are  not  monopolistic;  they  are  fluid.  Their  structure  is  different  from 

traditional  organized  crime.  We  have  observed  that  a  group  of  Russians  may 
band  together  to  devise  and  execute  a  particular  scheme  and  continue  in  that 
mode  until  they  are  either  stopped  by  law  enforcement  or  until  something  better 
comes  along.  There  may  be  a  leader  of  the  scheme  but  there  does  not  seem  to 
be  an  organizational  hierarchy  which  continues  beyond  that  particular  group. 
This  has  been  particularly  true  in  the  motor  fuel  excise  tax  schemes. 

Motor  Fuel  Excise  Tax  Evasion 

What  started  out  as  a  novel  fraud  scheme  contrived  by  a  fuel  retailer  in  Long 

Island  to  steal  federal  and  state  gasoline  taxes  quickly  evolved  into  a  serious 

noncompliance  problem  resulting  in  the  loss  of  more  than  "$1  billion"  in  revenue 

annually.   Initially,  gasoline  was  the  product  of  choice. 

Gasoline  is  sold  at  thousands  of  retail  locations,  and  gasoline  excise  tax 


145 


revenues  constitute  almost  70  percent  of  the  approximately  $20  billion  in  motor  fuel 
taxes  collected  annually. 

To  give  you  an  idea  of  the  money  involved,  an  average  tanker  truck  holds  8 
thousand  gallons  of  fuel.  The  combined  federal  and  state  taxes  per  gallon  of  fuel  can 
exceed  40  cents.  So,  the  average  tax  per  tanker  is  $3,200.  The  complicated  "bootleg" 
or  "daisy  chain'  schemes,  devised  by  the  Russians,  puts  that  $3,200  per  tanker  into 
their  pockets  instead  of  the  US  Treasury.  When  one  considers  that  a  large  scheme 
can  move  10  to  70  loads  of  fuel  per  day,  the  losses  can  be  staggering!  This  revenue 
that  could  have  been  used  to  build  and  maintain  our  national  transportation  systems 
and  infrastructure  is  stolen.  These  stolen  revenues  have  enriched  traditional  organized 
aime  families  and  furnished  the  means  by  which  "Russian"  organized  criminal 
elements  initially  consolidated  and  ultimately  expanded  the  scope  of  their  sinister 
activities  in  the  United  States. 

To  say  that  these  bootleg  and  daisy  chain  schemes  are  complicated,  w^ell 
planned,  well  organized  operations  would  be  an  understatement!  Yet  they  can  be 
unraveled.  We  have  been  doing  that  successfully  for  over  10  years.  To  briefly 
demonstrate  the  complexity  of  these  schemes,  the  following  are  some  examples  of 
daisy  chain  and  a  bootleg-type  operations. 
Daisy  Chain 

A  daisy  chain  scheme  is  the  method  which  was  developed  by  organized  crime 
expressly  for  the  purpose  of  stealing  federal  and  state  fuel  excise  tax  revenues.  Daisy 
chains  are  schemes  \Nh\ch  capitalized  on  weaknesses  in  our  motor  fuel  excise  tax  laws. 
In  the  typical  daisy  chain  operation,  a  complex  paper  trail  of  motor  fuel  transactions  is 


146 


created.  At  some  point  along  the  chain,  the  sale  is  fictitiously  invoiced  as  tax-paid  fuel, 
but  the  company  supposedly  claiming  to  have  paid  the  tax  turns  out  to  be  a  fictitious 
entity,  or  an  entity  with  no  assets  called  a  "burn"  company.  By  the  time  auditors  and 
investigators  unravel  the  series  of  transactions  to  determine  the  tax  liability,  the  so- 
called  "bum"  company  has  disappeared  without  a  trace  of  records  or  assets. 

For  such  an  operation  to  work,  ihe  perpetrator  must  be  able  to  purchase  fuel  tax- 
free.  In  the  case  of  the  federal  excise  tax,  this  means  having  a  registration  number 
assigned  by  the  IRS  on  Form  637,  Certification  of  Exemption.  Legitimate  registration 
numbers  have  been  obtained  for  fraudulent  purposes  by  buying  out  registered 
companies  or  falsifying  documents  of  legitimate  companies. 

The  Newark  investigation  we  called  "Red  Daisy"  was  an  ambitious  undercover 
operation  that  exposed  organized  crime  influence  in  the  fuel  business  in  New  York, 
New  Jersey  and  Pennsylvania  organized  and  executed  by  Russian  emigres  under  the 
protection  of  mob  boss  Anthony  (Fat  Tony)  Morelli.  The  first  phase  of  this  multi-part, 
two  year  investigation  focused  on  a  scheme  vi^iich  defrauded  the  federal  and  state 
governments  of  $60  million  in  fuel  excise  taxes.  In  this  scheme,  members  of  the 
Russian  "Mafia"  paid  tribute  to  members  of  New  York  organized  crime  families 
including  Mafia  godfather,  John  Gotti.  Over  100  million  gallons  of  fuel  were  sold.  The 
scope  of  this  operation,  its  inherent  complexity  and  risks  involved  were  daunting. 

During  the  course  of  this  investigation,  hundreds  of  meetings  and  over  1200 
telephone  conversations  were  recorded  and  transcribed.  Surveillances  were 
conducted  for  months  and  the  documentary  evidence  filled  a  1 ,000  square  foot  storage 
area.  As  the  investigation  progressed,  our  undercover  agents  became  so  influential  in 


147 


the  bootleg  fuel  industry  that  mobsters  warned  them  to  join  their  operation,  get  out  of 
the  business,  or  suffer  the  consequences.  This  threat  became  reality  when  the  building 
being  operated  by  the  undercover  agents  was  burned  to  the  ground. 

In  spite  of  the  dangers  involved,  the  Red  Daisy  was  a  great  success.  As  of  this 
date  all  defendants  have  been  convicted.  Moreover,  on  August  8,  1995,  the  second 
phase  of  the  Red  Daisy  indictment  was  announced  by  a  grand  jury.  This  indictment 
charged  25  corrupt  fuel  dealers,  along  with  members  of  both  traditional  and  organized 
crime  from  the  former  Soviet  Union,  with  the  theft  of  over  $140  million  in  federal  motor 
fuel  excise  tax  revenue.  This  case,  currently  awaiting  trial,  is  the  largest  tax  evasion 
case  in  history. 

In  Atlanta,  our  IRS  agents  unraveled  a  complicated  daisy  chain  scheme  whereby 
Russians  attempted  to  establish  themselves  in  Georgia.  Michael  Vax,  Ilia  Miller  and 
eight  other  defendants  (mostly  Russians)  fraudulently  obtained  IRS  Form  637 
exemption  certificates  for  the  purpose  of  purchasing  fuel  tax  free.  They  then 
constructed  an  elaborate  series  of  daisy  chain  schemes  to  steal  the  excise  taxes 
collected  from  retailers.  They  took  careful  steps  to  conceal  their  aiminal  enterprise, 
including  the  creation  of  double  sets  of  financial  records  and  structuring  cash 
transactions  to  buy  fuel  for  their  bootleg  business  and  return  cash  to  co-conspirators 
which  enabled  them  to  launder  their  profits.    During  this  investigation,  the  criminal 
enterprise  sold  over  6,000,000  gallons  of  diesel  and  130,500  gallons  of  gasoline  and 
evaded  $1.6  million  in  taxes.  Vax  and  his  co-conspirators  were  charged  with 
racketeering  (RICO)  activity,  money  laundering  and  tax  evasion.  All  were  subsequently 
convicted.  Vax  received  a  41  month  prison  sentence. 


148 


Bootleg  Scheme 

Bootlegging  is  a  term  which  denotes  any  scheme  to  sell  illegal  or  untaxed 
products.  (This  harks  back  to  the  days  of  prohibition  when  organized  criminals  sold 
bootleg  liquor.)    For  the  Russians,  one  of  the  ways  in  which  they  get  untaxed  fuel  is  by 
creating  false  Forms  637  and  presenting  them  to  wholesalers  to  dupe  the  wholesalers 
into  selling  them  diesel  fuel  tax  free. 

In  an  IRS  investigation  in  California  called  "Diesel  Storm,"  Joseph  Yosi  Ezra  and 
Leah  Isaac  pled  guilty  to  their  involvement  in  a  scheme  which  stole  almost  $2  million  in 
federal  excise  taxes  in  just  two  months.  Using  false  Forms  637,  the  pair  bought  over  10 
million  gallons  of  diesel  fuel  tax  free  and  sold  it  to  dealers  or  at  service  stations  v^ich 
they  owned,  thereby  giving  themselves  a  competitive  advantage  so  that  they  could  sell 
their  fuel  at  cheaper  prices  and  still  make  a  profit.  These  are  just  some  of  the  schemes 
investigated  around  the  country.  Regardless  of  size,  they  dramatically  illustrate  the 
potential  damage  to  our  economy  that  can  occur  if  these  schemes  go  unchecked. 

I  must  point  out  that  fuel  excise  tax  evasion  hurts  not  only  the  federal  and  state 
governments  by  depriving  them  of  revenue,  but  has  a  profound  negative  impact  on 
legitimate  fuel  distributors  and  retailers  as  well.  Their  market  shares  erode,  their  profits 
decline  and  some  are  even  forced  out  of  business.  Honest  businessmen  simply  cannot 
compete  with  criminals. 
The  History  of  "Fuel" 

In  the  1980's,  the  major  oil  companies  sold  many  of  their  brand  name  service 
stations  and  fuel  terminals  in  the  New  York  metropolitan  area.  Many  were 


149 


subsequently  acquired  by  members  of  various  immigrant  groups,  among  them 
immigrants  from  the  former  Soviet  Union.  When  the  potential  of  motor  fuel  excise  tax 
schemes  was  recognized  by  organized  crime,  the  Russians  were  in  an  ideal  position  to 
sell  bootleg  gasoline  at  the  stations  they  controlled. 
Gasoline 

During  1984-1988,  gasoline  schemes  abounded  -  and  they  were  large  schemes 
which  often  took  years  to  investigate  using  traditional  methods.  Further,  no  matter  how 
many  bootleggers  we  convicted,  more  stood  ready  to  become  involved  in  these 
schemes  because  the  lure  of  illicit  profits  was  simply  too  great. 

In  1988,  legislative  reforms  moved  the  point  of  taxation  on  gasoline  from  the 
wholesale  distributor  level  to  the  terminal  rack.  This  change  resulted  in  substantially 
improved  compliance.  Denied  the  ability  to  steal  gasoline  excise  tax  revenue,  the 
Russians  quickly  began  to  organize  instead  diesel  fuel  evasion  schemes.  Because  the 
demand  for  diesel  fuel  is  much  less  than  gasoline,  the  Russians  were  forced  to  expand 
their  operations  from  New  York  into  New  Jersey,  Pennsylvania,  Georgia  and  Ohio,  as 
well  as  other  previously  unaffected  areas. 

The  diesel  fuel  evasion  problem  worsened  from  1 988  to  1 991 .  We  began  to 
utilize  ambitious,  deep  penetration  undercover  operations  to  address  this  problem,  and 
we  had  tremendous  success. 

For  example,  over  a  two  year  period,  beginning  in  June  1990,  taxable  gallons  of 
diesel  fuel  reported  declined  in  the  State  of  Pennsylvania  from  963,484,013  to 
932,672,803.  This  drop  in  taxable  gallons  reported  and  the  corresponding  drop  in 
revenue  was  almost  totally  attributable  to  the  influence  of  organized  crime. 

10 


25-049  0-96-6 


150 


Beginning  in  March  1993  and  continuing  through  August  1995,  our  undercover 
operations  resulted  in  10  major  indictments.  Collectively,  these  investigations  are 
some  of  the  most  significant  in  the  history  of  motor  fuel  prosecutions,  involving  136 
defendants  and  over  $363  million  in  evaded  taxes.  Among  these  defendants  are  some 
of  the  highest  ranking  members  of  both  traditional  organized  crime  and  organized  crime 
from  the  former  Soviet  Union.  To  date,  99  defendants  have  pled  guilty  or  have  been 
convicted;  the  remaining  37  are  awaiting  trial.  These  cases  are  but  a  part  of  the  21 1 
persons  indicted  for  motor  fuel  excise  tax  evasion  during  the  past  three  fiscal  years. 

These  successful  prosecutions,  including  that  of  the  head  of  the  Russian  Mob  in 
New  York,  Morat  Balagula,  and  organized  crime  boss  Victor  Orena,  Jr.,  helped  break 
the  hold  of  organized  crime  on  the  retail  fuel  distribution  industry  in  the  New  York 
metropolitan  area. 
Dyed  Fuel 

In  August  1993,  Congress  passed  the  Omnibus  Budget  Reconciliation  Act  of 
1 993.  The  Act  moved  the  point  of  taxation  of  diesel  fuel  from  the  wholesale  distributor 
level  to  the  terminal  rack.  Further,  this  legislation  provided  that  only  dyed  fuel  is 
exempt  from  tax  after  January  1 ,  1 994  and  that  dyed  fuel  can  not  be  used  on  the 
highway.  It  must  be  used  for  off-road  purposes  such  as  for  home  heating  or  farm  use. 

These  important  legislative  changes,  supported  by  the  fuel  industry, 
revolutionized  the  situation  by  further  reducing  the  opportunity  for  evasion.  The 
implementation  of  diesel  fuel  dyeing  was  an  important  step.  Formerly,  fuel  used  for  tax 
exempt  purposes  was  not  distinguishable  from  the  taxed  product.  This  made  diversion 
of  the  product  for  illegal  purposes  a  simple  matter.  Dyed  fuel,  by  contrast,  is  exempt 

11 


151 


from  tax,  and  because  of  its  vivid  red  coloring,  any  attempted  use  of  it  on  our  highways 
can  be  readily  discovered  by  the  IRS  Examination  Division  through  the  spot  checking 
of  temriinals  and  tmcks.  This  legislative  remedy,  however  simple  it  may  seem,  has 
produced  significant  increases  in  compliance. 
Revenue  Enhancements 

As  a  result  of  these  important  legislative  changes  and  our  investigative 
successes,  federal  diesel  fuel  receipts  increased  during  calendar  year  1994  by 
$1,765  billion.  Of  this  increase,  $681  million  is  attributable  to  the  Diesel  Compliance 
Initiative. 

State  revenues  across  the  nation  have  risen  an  average  of  almost  7  percent.  In 
the  worst  affected  states,  this  increase  in  revenue  was  almost  20  percent  annually. 
Cocktailed  Fuel 

So  is  the  problem  fixed?  Not  yet.  The  Russians  are  quite  tenacious.  Denied 
one  avenue  to  evade  taxes,  they  seek  another.  One  of  the  current  methods  of  evasion 
involves  the  blending  and  extending  of  the  volume  of  taxable  fuels.  Good  fuel  is 
blended  with  nontaxed  products  such  as  kerosene,  waste  oil,  tranmix,  toxic  waste  and 
other  products  into  a  mixture  called  "cocktailed  fuel.'  Excise  taxes  are  not  paid  on  the 
extended  volume.  This  method  of  evasion  extends  the  taxable  fuel  plus  it  takes  care  of 
the  high  costs  of  disposing  of  toxic  waste.  Criminals  are  selling  these  substandard  and 
dangerous  products  to  unsuspecting  retail  dealers  and  motorists  in  many  parts  of  the 
country.  This  junk  is  clogging  engines  and  even  worse,  it  is  polluting  our  air. 

Another  new  scheme  for  the  Russians  involves  purchasing  taxed  fuel  (both 
federal  and  state  taxes)  in  a  low  tax  state  such  as  New  Jersey  and  shipping  it  to  a  high 

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tax  state  such  as  New  York.  This  simple  scheme  can  result  in  up  to  a  1 2  cent  per 
gallon  advantage  for  the  criminals  in  a  business  in  which  profit  margins  are  ordinarily  2 
to  3  cents  per  gallon.  The  State  of  New  York  estimates  that  this  type  of  evasion 
scheme  has  cost  them  $20  million  in  revenue  in  the  last  18  months. 

During  1994  and  1995,  in  Los  Angeles,  California,  a  group  of  Armenians  and 
Russians  made  a  concerted  effort  to  dominate  the  independent  fuel  retailing  industry  by 
carrying  out  daisy  chain  evasion  schemes  to  steal  state  excise  tax  revenues.  Before 
the  recent  law  changes,  this  group  had  previously  evaded  Federal  diesel  fuel  taxes  as 
well.  On  September  13,  1995,  15  members  of  this  group  were  indicted  for  tax  evasion, 
extortion,  drug  trafficking  and  the  procurement  of  prostitutes  from  the  former  Soviet 
Union.  Prior  to  indictment,  this  group  had  been  actively  experimenting  with  ways  to 
defeat  the  new  federal  diesel  fuel  laws. 

Despite  the  success  we  have  had  in  combating  motor  fuel  excise  tax  evasion 
schemes  in  the  past,  it  would  be  naive  to  think  that  the  Russians  will  simply  abandon 
their  efforts  to  steal  motor  fuel  excise  taxes.  We  believe  they  will  continue  to  attempt  to 
circumvent  the  law. 

It  should  be  noted  that  no  matter  how  successful  the  government  is  in 
prosecuting  motor  fuel  excise  tax  evaders,  the  Russians  are  so  clever  and  persistent 
that  only  a  comprehensive  approach  encompassing  enforcement,  regulation,  legislative 
reform  and  close  federal,  state  and  industry  cooperation  can  truly  curtail  their 
operations. 

Since  1991,  IRS  has  obtained  over  190  convictions  against  many  important 
members  of  organized  crime  and  corrupt  fuel  dealers.  The  achievements  in  the  fuel 

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excise  tax  evasion  area  are  the  result  of  a  collective  effort  and  are  a  tribute  to  v^at  can 
be  achieved  when  government  and  industry  work  together.  I  am  proud  of  the  role  that 
the  Internal  Revenue  Service,  and  Criminal  Investigation  in  particular,  has  played  in 
bringing  about  these  successes. 
The  Future 

We  have  studied  the  problems  regarding  organized  crime  from  the  former  Soviet 
Union  as  it  relates  to  motor  fuel  excise  tax  evasion.  We  have  investigated  their 
schemes.  Congress  has  implemented  significant  legislative  changes.  As  a  result,  we 
have  seen  crime  in  this  area  reduced. 

I  do  not  want  to  leave  you  with  the  impression  that  the  IRS  is  only  concerned 
about  the  effect  of  organized  crime  from  the  former  Soviet  Union  on  the  fuel  business. 
We  have  seen  these  groups  branch  out  into  some  of  the  more  "traditional"  areas  of 
crime.  We  now  have  IRS  special  agents  actively  involved  in  investigations  regarding 
narcotics,  health  care  fraud,  insurance  fraud,  prostitution  and  diversion  of  assets 
earned  in  Russia  from  the  sale  of  natural  resources  such  as  oil,  timber,  and  diamonds. 

As  an  example,  in  California,  Russian  emigr6  Michael  Smushkevich  was  the 
mastermind  of  a  medical  diagnostic  testing  scheme  that  generated  $1  billion  of 
fraudulent  billings  to  medical  insurance  carriers.  Approximately  $300  million  was  paid 
to  the  Smushkevich  organization  which  was  ultimately  wired  to  foreign  cities  including 
Moscow.    In  September  1994,  Smushkevich  pled  guilty  to  charges  including  money 
laundering  and  was  sentenced  to  21  years.  The  doctor  who  ran  the  clinics,  Russian 
emigre  Bogich  Jovovich,  also  pled  guilty  to  charges  including  money  laundering  and 
was  sentenced  to  20  years. 

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We  recognize  that  the  organized  criminal  element  will  not  go  away  any  time 
soon  in  America.  But,  we  continue  to  stay  on  the  paper  trail  of  these  organizations. 

So,  is  the  problem  of  organized  crime  from  the  former  Soviet  Union  fixed?  No. 
One  means  by  which  these  criminal  organizations  might  be  more  effectively  combated 
in  the  future  is  through  international  cooperation. 

Earlier  in  this  statement,  I  made  numerous  observations  about  the  Russians. 
Well,  there  is  someone  else  who  is  also  watching  this  group  of  organized  criminals  very 
closely  -  and  they,  too  have  concerns.  They  are  the  newly  formed  Russian 
Government's  national  police,  called  the  MVD,  and  the  Russian  Tax  Police.  We  are 
joining  forces  with  these  officials  in  areas  of  mutual  concern  to  create  a  formidable 
force  that  might  just  break  and  hopefully  dissolve  this  threat  of  organized  crime  from  the 
former  Soviet  Union. 

Since  March  1995,  IRS  has  taught  financial  investigative  techniques  to  over  350 
law  enforcement  personnel  from  the  Russian  Federation  of  Tax  Police,  the  Ukraine 
Ministry  of  Finance  and  state  tax  inspection  police,  the  Ministry  of  Finance  in  Minsk, 
Belarus,  and  mid  level  managers  and  criminal  investigators  of  the  Russian  Tax  Police 
in  St.  Petersburg,  Russia.  The  student  population  ranges  from  the  Assistant  Minister  of 
Finance,  to  the  top  Tax  Police,  to  the  Ministry  of  Internal  Affairs,  to  regular  tax  police. 

Additionally,  a  12  hour  course  has  been,  and  is  continuing  to  be,  taught  by  IRS 
special  agents  at  the  International  Law  Enforcement  Academy  in  Budapest,  Hungary. 
This  academy  is  a  State  Department-  sponsored  program  which  has  the  full  support  of 
the  IRS  -  in  fact,  IRS  Commissioner  Margaret  Richardson  participated  in  the  dedication 
ceremonies  of  the  academy  in  April  of  this  year.  Some  of  the  course  topics  taught  by 

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IRS  include  Documentation  and  Evidence,  Indicators  of  Financial  Fraud,  Money 
Laundering,  and  Methods  of  Proof. 

Additionally,  IRS  is  part  of  the  assessment  team  which  recently  returned  from 
Moscow.  The  team  includes  a  representative  from  the  Secret  Service,  the  Federal 
Reserve,  the  Office  of  the  Comptroller  of  the  Currency,  and  the  Federal  Bureau  of 
Investigation.  The  purpose  of  the  team  visit  was  to  conduct  a  joint  needs  assessment 
for  the  Russian  banking  system  with  an  eye  to  preventing  fraud  and  money  laundering. 
The  recommendations  include  tighter  banking  regulations,  new  money  laundering 
legislation,  and  training  for  law  enforcement  and  the  banking  community. 

During  the  recent  visit  to  Moscow,  the  MVD  and  Tax  Police  requested  that  IRS 
assign  a  special  agent  to  the  Embassy  in  Moscow  to  assist  and/or  work  jointly  with 
them  on  investigations  involving  financial  crimes  and  money  laundering.   In 
coordination  with  the  U.S.  Ambassador  and  the  State  Department,  we  are  currently 
considering  their  invitation. 

With  continued  vigilance,  cooperation  and  legislative  support  such  as  I  outlined 
here  today,  we  can  make  great  progress. 

Mr.  Chairman,  I  will  be  happy  to  answer  any  questions  you  and  the  other 
subcommittee  members  may  have. 


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156 


STATEMENT  OF  IGOR  NIKOLAYEVICH  KOZHEVNIKOV 

DEPUTY  MINISTER  OF  INTERIOR 

RUSSIAN  MINISTRY  OF  INTERIOR  AFFAIRS 

Ladies  and  gentlemen! 

Allow  rae  to  express  my  gratitude  for  this  opportunity  to  share  with  you  my  vision  of 
the  aforeracniioncd  issue. 

A  year  and  a  half  ago  my  colleague  Deputy  Minister  of  the  Internal  Affairs  General 
Egorov  spoke  before  you  about  the  development  of  the  organized  crime  in  Russia  and  its 
impact  on  social  and  economic  life  of  the  country. 

The  analysis  of  the  dynamics  and  structure  of  crime  demonstrates  that  the 
criminalization  process  that  enveloped  most  sensitive  spheres  of  the  social  order,  continues 
increasing  citizens'  anxiety  for  their  personal  security,  safety  of  their  property,  life  and  health 
of  their  loved  ones. 

Regional  separatism  ha.s  brought  about  the  bitterness  of  new  losses.  The  embodiment 
of  this  monstrous  phenomenon  was  Dudaev's  regime  which  inflicted  incalculable  sufferings 
not  only  on  the  Chechen  but  also  on  other  peoples  of  Russia. 

The  process  of  denationalization,  inevitable  in  the  course  of  economy  reformation, 
appeared  to  be  somewhat  unclear  for  a  significant  part  of  the  society,  according  to  experts, 
largely  due  to  unjustifiably  rapid  and  high  concentration  of  capflaJ  in  the  hands  of  individuals. 

It  not  only  deepened  social  inequity  among  certain  groups  of  population  but  also 
intensified  struggle  for  spheres  of  influence  among  newborn  businessmen,  who,  in  their 
majority,  have  criminal  experience  and  tics  with  the  criminal  world. 

Out  of  2.5  million  juridical  persons  accounted  for  by  tax  agencies  93%  represent  non- 
state  sector  of  the  economy.  Initially  insufficiently  regulated  by  the  law  il  still  remains  open 
for  criminal  structures,  as  the  "purity"  of  the  capital  is  not  an  essential  condition  in 
privatization  and  joint-stock  transactions. 

The  hopes  of  more  than  3  million  of  our  inexperienced  compatriots  driven  largely  by 
the  intention  to  protect  their  savings  from  inflation  but  not  by  greediness  and  venturous 
interests,  ai'c  buried  under  the  debris  of  numerous  financial  "pyramids". 


157 


'Tranfsparcnt"  borders,  insufficiently  stringent  registration  control  of  ncwcoming 
foreign  citizens,  permanent  flow  of  refugees  and  forcibly  displaced  persons  into  Russia  gave 
an  opportunity  to  the  guests  of  our  country  to  augment  the  number  of  criminals. 

By  the  way,  we  sec  all  the  danger  of  gaps  in  our  legislation  and  work  along  with  our 
legislators  on  improving  the  legal  basis. 

The  Parliament  Currently  has  under  consideration  bills  "On  organized  crime",  "On 
a)rruption",  drafts  of  Criminal  Code  and  Criminal  Prosecution  Code  of  the  Russian 
Federation,  a  series  of  principal  amendments  to  other  laws  in  effect  relating  to  crime-fighting. 

We  expect  to  receive  an  extensively  renewed  modern  legal  basis  for  practical  use  by 
the  beginning  of  1997. 

Some  figures  which  characterize  the  .state  of  criminal  activity  in  Rus.sia. 

During  the  last  year  the  number  of  officially  registered  crimes  was  2.756  thousand 
which  is  a  4.7%  increa.se  comparing  to  1994.  59%  of  them  aic  qualified  by  the  criminal  law 
as  grave  offenses. 

Two  thirds  of  the  officially  registered  crimes  are  of  mercenary  nature,  the  number  of 
thefts,  armed  robberies  of  citizens*  homes,  vehicle  drivers,  collectors,  currency  exchanges 
significantly  increased. 

During  the  past  year  main  efforts  of  the  Russian  law  enforcement  agencies  were 
focused  on  accomplishing  tasks  held  by  the  Federal  program  on  enhancing  crime-fighting. 

The  number  of  solved  crimes  has  increased.  Persons  responsible  for.837  thousand 
gi'ave  offenses  have  been  identified.  In  order  to  reimburse  damage  from  illegal  activity 
forfeitures  of  illegally  acquired  properly  and  valuables  totalled  in  1.5  trillion  roubles. 

At  the  same  time  every  forth  crime,  two  thirds  of  armed  robberies,  most  of  the 
conti-act  murders  remained  unsolved. 

During  the  last  year  a  set  of  measures  on  suppressing  activity  of  criminal  group.s 
engaged  in  drug-trafficking  has  been  implemented. 

The  growth  of  drug-related  crimes  has  been  noted  almost  in  all  regions  of  Russia. 
Compared  to  1985  (i.e.  during  10  ycai-s)  they  have  increased  by  4.8  times. 


158 


Illegal  prcxluclion  of  conlrollcd  substances  continues  to  develop. 

The  manufacture  of  drugs  in  underground  laboratories  haa  become  a  significant  factor 
of  their  illegal  production  growth. 

However  a  most  dangerous  tendency  is  currently  a  rapid  enhancement  of  drug 
smuggling  to  the  Ruusian  territory. 

More  than  half  of  all  confiscated  controlled  substances  arc  of  foreign  origin.  Almost 
all  of  such  dangerous  and  expensive  drugs  as  cocaine,  opium,  heroin,  synthetic  drugs  quickly 
filling  the  Russian  market  arc  shipped  from  abroad  by  smuggling  channels. 

Only  the  cu,sloms  agencies  of  the  Russian  Federation  have  made  764  apprehensions  of 
drug-traffickers  (almost  twice  more  than  in  1994),  which  led  to  forfeiture  of  6.5  tons  of 
narcotics. 

The  analysis  of  crimes  relating  to  large  shipments  of  drugs  demonstrates  that  about 
25%  of  persons  responsible  for  them  are  citizens  of  the  former  republics  of  the  USSR.  They 
bring  into  Russia  up  to  30%  of  illegally  circulating  narcotics.  Most  of  the  drug-traffickers  are 
citizens  of  Ukraine,  Kazakhstan,  Azerbaidzhan,  Lithuania  and  Central  Asian  states. 

There  has  been  an  increase  in  illegal  shipments  of  drugs  from  the  countries  of  "far 
abroad".  These  primarily  arc  opium  from  Afghanistan,  shipped  through  Tadjikistan, 
Kyrgyzslan,  Turkmenistan  and  Uzbekistan,  cocaine  from  Columbia,  Peru  and  the  US,  heroin 
from  the  "Golden  triangle"  states  and  controlled  medical  substances  from  India.  Transit  of 
drugs  through  Russia  to  the  Western  Euivpe^ecomc*  increasingly  active. 

Aggregate  estimation  of  development  of  the  above  tendencies  allows  to  make  a 
conclusion  that  Russia  has  become  a  target  of  international  drug-trafficking  expansion,  A(^ 
Russian  criminal  drug-trafficking  groups. 

Let  me  say  a  few  words  on  the  sfituation  with  illegal  attempts  to  seize  radioactive 
materials. 

Theft  is  one  of  the  most  dangerous  type  of  crimes  connected  with  illegal  trafficking  of 
radioactive  materials.   27  of  such  crimes  were  committed  in  1993,  16  in  1994  and  5  in  1995. 


159 


As  a  rule,  they  were  committed  by  the  employees  of  ihc  facilities  where  ihcfi  of 
radioactive  materials  took  place.  In  90%  of  these  cases  responsibly  for  such  thefts  were 
common  workers. 

Circle  of  persons  involved  in  further  resale  has  been  forming  spontaneously  during 
search  for  the  buyers.  That  accounts  for  the  fact  that  there  are  no  grounds  for  insisting  on 
existence  of  mafia-type  organized  criminal  groups  specializing  in  theft  of  radioactive 
materials. 

Analysis  of  the  investigation  documents  demonstrates  that  the  primary  object  of  such 
criminal  attempts  are  the  sources  of  ionizing  radiation  used  in  small  quantities  in  various 
industrial  devices. 

Some  cases  involved  theft  of  technological  materials  with  isotope  composition  based 
on  metal  uranium-238  enriched  to  a  different  extent  by  uranium-235  or  its  derivatives. 

The  above  radioactive  materials  can  not  be  used  in  production  of  nuclear  weapons  due 
to  their  physical  characteristics. 

It  is  essential  to  note  that  during  1994-95  we  held  several  meetings  with  the 
representatives  of  the  US  and  German  law  enforcement  agencies  where  we  agieed  on  the 
mechanism  of  joint  uclivilies  aimed  at  prevention  of  such  crimes. 

I  would  like  to  take  a  closer  look  at  the  issues  of  fighting  organized  crime  in 
Russia. 

Contemporary  organized  crijnc  is  a  new  qualitative  level  of  professional  group  crime. 
This  is  reflected  not  only  in  a  high  level  of  professionalism  and  a  developed  network  of 
corruption  links,  but  also  by  a  broad  scale  of  its  activities  and  influence  exerted  on  a 
considerable  number  of  branches  of  the  national  economy  and  power  sUiictures. 

During  the  last  three  years  units  of  the  Russian  Ministry  of  Internal  Affairs  elicited 
about  22  thousand  organized  crirainiil  groups  with  different  extent  of  cohesion,  with  more  than 
94  thousand  members.  Almost  every  sixth  group  was  involved  in  inlcr-rcgional  and 
international  activities,  every  tenth  group  had  corruptive  links  with  federal  institutions. 


160 


A  violent  struggle  for  the  division  of  spheres  and  territories  of  influence  was  unleashed 
among  criminal  clans.  In  1995  alone  this  led  to  183  armed  clashes  leaving  156  murdered  and 
104  wounded. 

Despite  the  difficulty  of  the  criminal  situation,  law  enforcement  agencies  did  not  lose 
control  over  the  ongoing  processes,  and,  moreover  exercised  their  capabilities  of  resu-aining 
them. 

As  a  result  of  the  undertaken  measures  criminal  activities  of  14  000  organized  gn)ups 
were  stopped  during  the  last  three  years.  Charges  were  broughij*if  against  41^500  thousand 
leaders  and  participants. 

The  analysis  of  the  available  inrormation  disclosed  a  stable  tendency  of  the 
increase  of  the  number  of  Russian  organized  criminal  groups  engaged  In  illegal  activities 
abroad.  . 

According  to  the^operational  estimations  of  the  Russian  Ministry  of  Internal  Affairs, 
approximately  2000  members  of  1 10  Russian  criminal  groups  commit  crimes  in  44  countiies 
of  the  world.   Out  of  this  number  approximately  every  fifth  ciiminal  group  has  established 
links  in  Germany  and  every  seventh  -  in  the  United  States. 

According  to  our  data,  about  20  organized  criminal  groups  of  Russian  origin  are 
involved  in  illicit   activities  on  the  territory  of  the  United  States.  Their  main  interests  are 
concentrated  in  New- York  City,  Los-Angeles  and  Miami  and  include  primarily  money 
laundering,  finance  fraud,  racketeering,  drug-trafficking,  etc.  US  citizens  are  becoming  their 
victims;  a  number  of  frauds  committed  in  Russia  were  planed  by  the  iramigi-ants  from  the 
former  Soviet  Union  on  the  US  soil. 

Today  jointly  with  the  FBI  we  investigate  56  cases  which  involve  over  400  persons 
suspected  of  links  with  the  organized  criminal  groups,  and  neaily  140  companies  and 
organizations  engaged  in  money-laundering  and  other  illegal  financial  operations. 

The  investigations  of  the  cases  of  the  Ivankov's  criminal  group,  the  penetj'ation  into 
the  computer  network  of  the  "Citibank",  the  group  of  international  swindlers  who  claimed  to 


161 


represent  a  US-bascd  company  "NEWTEL  CO"   are  the  mosl  vivid  and  well-known 
illustrations  of  our  interaction. 

I  would  like  to  conclude  with  the  following. 

The  criminals  unite  and  pose  a  real  threat  to  the  entire  world  community. 

Meanwhile,  international  legal  measures  of  extradition  of  criminals,  and  restitution  of 
properly  or  reimbursed  money  acquired  by  means  of  illegal  activities  are  insufficient. 

Nowadays  the  Russian  Federation  makes  ct)n8iderablc  cfforus  to  establish  an 
appropriate  international  legal  basis  for  a)opcration  between  the  Russian  law  enforcement 
institutions  with  foreign  partners. 

It  is  a  fact  that  the  intention  to  sign  a  broad-scale  US-Russian  treaty  on  mutual  legal 
assistance  as  soon  as  possible  is  stated  in  the  joint  statement  by  the  President  Clinton  and 
President  Yeltsin  on  cooperation  in  the  field  of  law  enforcement  and  crime  fighting  of 
September  28,  1994  and  in  the  intergovernmental  agreement  of  1995. 

It  is  desirable  that  these  intentions  would  be  promptly  fulfilled. 

Thank  you  for  your  attention. 


162 

STATEMENT  OF 
MICHAEL  FRANZESE 

Good  morning  distinguished  members  of  the  Subcommittee. 

My  name  is  Michael  Franzese  and  I  have  been  subpoenaed  here  today  to 
address  the  Subcommittee  regarding  my  personal  experiences  with  Russian 
organized  crime  in  the  United  States.  In  order  to  understand  the  extent  of  that 
criminal  activity,  the  Subcommittee  needs  to  be  aware  of  my  own  background  and 
former  involvement  in  organized  crime. 

I  was  bom  in  Brooklyn,  New  York.  My  father  is  John  "Sonny"  Franzese, 
former  underboss  of  the  Colombo  Crime  Family,  one  of  New  York's  five  La  Cosa 
Nostra  families.  In  1975, 1  became  a  "made"  member  of  the  Colombo  Family  in  a 
formal  induction  ceremony  presided  over  by  then-Family  Boss,  Thomas  DiBella.  I 
acted  in  the  capacity  of  "Soldier"  from  1975  through  1980,  when  I  was  appointed  a 


163 

"Caporegime"  and  given  a  crew  of  soldiers  to  preside  over. 

During  the  years  I  was  a  member,  I  engaged  in  criminal  activity  on  my  own 
behalf  as  well  as  that  of  the  Colombo  Family.  Such  criminal  activity  included:  tax 
fraud,  loan  sharking,  gambling,  securities  fraud,  labor  racketeering,  and  extortion. 

In  1985, 1  was  indicted  in  the  Eastern  District  of  New  York  for  various 
racketeering  charges.  In  1986,  as  part  of  a  plea  agreement  with  the  Organized 
Crime  Strike  Force  of  the  Department  of  Justice,  I  pled  guilty  to  two  counts  of  the 
28  count  indictment  relating  to  tax  fraud.  I  accepted  a  ten-year  prison  sentence  and 
fifteen  million  dollars  in  fines  and  restitution. 

In  or  about  1987,  while  in  federal  prison  in  California,  I  decided  to  sever  my 
twelve-year  relationship  with  the  Colombo  Crime  Family  and  organized  crime  in 
general.  As  I  address  the  Subcommittee  here  today,  I  am  no  longer  a  member  of 
organized  crime. 

In  early  1980,  while  I  was  a  Colombo  family  soldier,  Lawrence  lorizzo,  a 
major  independent  gasoline  wholesaler  based  in  Long  Island,  New  York,  came  to 


164 

me  for  protection.  lorizzo  and  Russian  organized  crime  figures,  working 
independently  of  one  another,  each  figured  out  how  to  orchestrate  one  of  the  most 
lucrative  government  rip-offs  of  all  time  —  stealing  gas  tax  money.  As  you  have 
been  told  by  previous  witnesses,  this  was  a  complex  scam  that,  over  the  years,  has 
netted  Italian  and  Russian  organized  crime  hundreds  and  hundreds  of  millions  of 
dollars.  And  the  Russians  pioneered  and  perfected  these  schemes  to  where,  I 
understand,  it  is  still  going  on  today,  despite  changes  in  the  law. 

I  first  got  involved  because  some  mob  figures  were  trying  to  shake  down 
lorizzo.  lorizzo  owned  or  operated  some  300  independent  gas  stations  throughout 
Long  Island  at  that  time.  It  was  a  cash-heavy  operation.  I  resolved  lorizzo 's 
problem  by  sending  some  of  my  guys  over  to  let  these  other  mob  figures  know 
lorizzo  was  with  me.  That  ended  lorizzo's  problem.  In  return,  I  became  his 
partner  in  the  wholesale  gasoline  business. 

Later  in  1980, 1  began  working  with  Russians  in  the  gas  tax  business.  One 
of  my  soldiers,  a  guy  named  "Vinnie,"  had  been  approached  by  the  Russians  to 
help  collect  a  $70,000  debt.  Vinnie's  job  was  to  say,  "Pay  the  money  or  I'll  break 
your  legs"  and  to  sound  convincing,  which  he  was.  My  guy  came  to  me  with  the 


165 

Russian's  offer  to  see  if  I  was  interested.  I  was  and  so  I  arranged  a  meeting  with 
the  leaders  of  this  Russian  organized  crime  group:  Michael  Markowitz,  David 
Bogatin,  and  Lev  Persits.  These  guys  owned  and  operated  a  wholesale  gasoline 
company  in  Brooklyn,  New  York. 

These  Russians  were  having  problems  collecting  money  owed  them.  There 
were  also  having  problems  in  getting  and  holding  onto  the  licenses  they  needed  to 
keep  the  gas  tax  scam  going.  I  could  help  them  on  both  counts.  First,  the  Colombo 
family's  reputation  was  very  effective  in  causing  people  to  pay  their  debts.  Also, 
our  family  had  a  guy  at  the  Commissioner  of  Revenue's  office  at  the  state  house  in 
Albany  who  could  get  the  necessary  licenses. 

The  Russians  were  eager  to  align  themselves  with  someone  who  could 
resolve  both  problems.  Because  of  my  association  with  organized  crime,  they 
believed  me  to  be  that  person.  As  it  turned  out,  I  was. 

We  arranged  a  sit-down  on  a  Satxirday  morning,  in  the  fall  of  1980,  at  a 
Mobil  station  they  owned  in  Brooklyn.  The  three  Russians  told  me  how  they  were 
stealing  tax  money  due  the  government  on  the  sale  of  gasoline  and  how  they  often 


166 

ran  into  problems  collecting  some  of  the  illegal  proceeds  from  their  customers. 

We  cut  a  deal  whereby  they  agreed  to  become  part  of  my  organization.  I 
would  provide  them  with  protection  from  the  other  mob  families  and  the  muscle  to 
collect  all  the  money  due  them.  Through  the  services  of  Lawrence  lorizzo  and  oixr 
gasoline  operation  they  would  have  access  to  the  wholesale  licenses  they  needed  to 
defraud  the  state,  county,  and  federal  government  out  of  tax  revenue.  We  agreed  to 
share  the  illegal  proceeds:  75%  my  end  -  25%  their  end.  The  deal  was  put  on 
record  with  all  five  crime  families  and  I  took  care  of  the  Colombo  family  share  of 
the  illegal  proceeds  out  of  my  end. 

Over  the  next  four  and  a  half  years,  the  combined  Russian/Iorizzo 
organization,  which  I  controlled,  defrauded  the  United  States  government  and  the 
states  and  counties  of  New  York,  Connecticut,  New  Jersey,  Pennsylvania,  and 
Florida  out  of  hundreds  of  millions  of  tax  dollars  due  on  the  sale  of  gasoline. 

To  give  you  an  idea  how  lucrative  the  gas  tax  business  was,  it  was  not 
unusual  for  me  to  receive  $9  million  in  cash  per  week  in  paper  bags  from  the 
Russians  and  lorizzo.  Our  profits  ran  anywhere  from  two  to  thirty  cents  per  gallon. 


167 

and,  at  one  point,  we  were  doing  400-500  million  gallons  per  month.  I'll  leave  it  to 
you  to  do  the  math. 

During  that  time,  I  became  very  closely  involved  with  the  Russian  group.  I 
found  them  to  be  intelligent,  possessing  remarkable  business  instincts  that  they 
would  not  hesitate  to  use  for  illegal  gain.  As  a  result  of  their  experiences  living  in 
Communist  Russia,  they  have  little  respect  for  United  States  law  and  little  fear  of 
American  prisons. 

They  would  frequently  approach  me  with  other  illegal  business  ventures  and 
were  eager  to  share  in  illegal  deals  I  would  propose  to  them  (loan  sharking, 
insurance  fraud,  securities  fraud).  One  of  the  business  ventures  we  jointly  entered 
•  into  was  buying  a  bank  in  Austria.  The  purpose  was  to  be  able  to  use  this  bank  to 
finance  other  organized  crime  ventures.  I  invested  $10  million  from  Colombo 
family  gas  tax  profits  in  this  bank.  Including  the  money  invested  by  the  Russians, 
the  bank  had  a  total  of  $80-100  million  in  assets.  Bogatin  later  went  to  Austria, 
where  he  played  an  active  role  in  operating  this  bank.  Also,  lorizzo  created  a 
"slush  fund"  from  gas  tax  money,  which  he  kept  in  this  Austrian  bank.  That 
account  amounted  to  $1 5  million  when  the  Government  seized  it  after  lorizzo's 


168 


arrest. 


I  found  the  Russians  to  be  a  group  that  wanted  to  flex  their  muscles  and 
would  not  hesitate  to  resort  to  violence  when  they  felt  it  necessary  to  do  so.  They 
enjoyed  the  relationship  with  both  myself  and  the  Colombo  family  because  it  gave 
them  power  and  recognition  as  a  group  to  be  reckoned  with. 

I  did  not  find  the  Russian  criminals  to  be  a  very  structured  group  in 
comparison  to  the  Italian  La  Cosa  Nostra.  They  were  very  "clannish,"  however, 
and  the  most  financially  successfial  Russian  was  looked  up  to  by  his  comrades  as 
their  leader  or  boss.  The  boss  was  given  a  lot  of  courtesy  and  respect  and,  in 
return,  provided  the  members  of  his  group  with  opportunities  to  work  for  him  and 
make  money. 

Michael  Markowitz,  David  Bogatin,  and  Lev  Persits  were  all  in  a  position  of 
leadership  and  had  about  200  other  Russians  working  under  them  in  various 
capacities.  They  were  also  continuously  assisting  other  Russians  in  immigrating  to 
the  United  States. 


169 

After  I  went  to  prison  in  1985,  my  information  was  that  Markowitz,  Bogatin 
and  Persits  did  continue  to  worlc  with  the  Colombo  family  in  the  gasoline  business 
for  a  short  period  of  time. 

Around  1988,  Markowitz  was  shot  and  killed  in  front  of  his  home  in 
Brooklyn.  I  do  not  know  who  was  responsible  for  his  death,  however,  I  am 
reasonably  certain  that  the  hit  was  authorized  by  the  Colombo  family  and  could 
possibly  have  been  carried  out  by  other  Russians. 

An  attempt  was  also  made  on  the  life  of  Lev  Persits.  Although  he  survived 
the  attempt,  he  is  permanently  disabled  and  confined  to  a  wheelchair. 

David  Bogatin  fled  to  Austria  where  he  had  a  controlling  intetest  in  the  bank 
that  was  funded  with  gasoline  tax  money  from  our  operation.  He  was  captured  in 
Poland,  extradited  to  the  United  States  to  face  tax  fraud  charges  and  is  currently 
serving  a  federal  prison  sentence. 

I  have  provided  the  Subcommittee  with  a  basic  overview  of  my  personal 
experiences  with  Russian  immigrants  engaging  in  criminal  activities  during  the 
1980's.  I  hope  this  information  is  helpful.  I  would  be  happy  to  answer  any 
questions  the  Subcommittee  might  have.  Thank  you. 


170 


STATEMENT  OF  ANTHONY  CASSO 

Good  afternoon,  Mr.  Chairman  and  members  of  the  Subcommittee.  My  name  is  Anthony 
Casso.  Early  in  my  life,  I  was  given  the  nickname  "Gaspipe." 

I  have  been  in  jail  since  1993,  when  I  was  arrested  after  being  a  fiigitive  for  almost  three 
years.  At  that  time,  I  was  the  underboss  of  the  Lucchese  organized  crime  family.  Ultimately,  I 
decided  to  cooperate  rather  than  go  to  trial.  As  part  of  my  deal  with  the  Government,  I  pleaded 
guilty  to  a  72  count  indictment,  including  murder,  racketeering  and  extortion.  I  have  not  yet 
been  sentenced,  and  no  promises  have  been  made  to  me  for  my  testimony  here  today. 

As  part  of  my  cooperation  agreement,  I  told  the  Government  about  my  life  of  crime.  I 
gave  a  deposition  for  use  in  an  Israeli  trial,  but  I  have  not  yet  testified  at  a  trial  in  the  United 
States.  I  will  testify,  if  requested  by  the  Government,  at  upcoming  organized  crime  trials. 

I  have  been  involved  with  organized  crime  for  more  than  35  years,  since  I  was  a  kid 
working  on  the  docks  in  Brooklyn,  New  York.  When  I  was  21,1  became  associated  with  a  guy 
named  Chris  Fumari  of  the  Lucchese  organized  crime  family.  Everybody  knows  him  as  "Christy 
Tick." 

Before  I  was  arrested  this  time,  I  had  only  been  in  jail  once.  That  was  in  1962  for  five 
days  when  1  was  convicted  of  rtinning  a  bookmaking  operation  on  the  docks  and  fined  $50. 
After  that,  I  was  arrested  several  times  for  different  Federal  and  state  charges,  including  assault 
with  a  gun,  selling  stolen  property,  dealing  heroin,  burglarizing  a  bank,  and  bribing  state  parole 
officers.  In  every  case,  I  was  either  acquitted  or  the  charges  were  dropped. 

In  the  early  1970s,  I  met  Vic  Amuso.  Then,  in  1974, 1  became  a  "made"  member  of  the 
Lucchese  family.  Vic  was  made  in  around  1977.  At  that  time,  "Tony  Ducks"  Corallo  was  the 
boss  of  our  family.  But,  in  1986,  Tony  Ducks  went  to  jail  so  he  had  to  name  a  new  boss.  I 
became  a  "capo"  in  1986.  After  discussions  within  the  family,  Tony  Ducks  made  Vic  Amuso  the 
boss  at  the  end  of  1986.  At  the  end  of  1987,  Vic  told  me  1  was  the  new  consiglieri.  Then,  in 
1989,  Vic  named  me  the  underboss  of  the  family.  After  Vic  was  arrested  in  July  1991, 1  ran  the 
Lucchese  family  as  underboss  while  I  was  a  fiigitive. 

In  my  position  as  a  member  of  the  Lucchese  Family,  I  came  to  know  individuals 
associated  with  Russian  organized  crime,  which  is  the  subject  1  have  been  asked  to  testify  about 
today. 

In  the  mid-1980s,  our  family  got  involved  with  Russian  organized  crime  in  the  gasoline 
business  in  Brooklyn.  Italian  and  Russian  organized  crime  made  large  amounts  of  money  by 
working  scams  to  avoid  paying  taxes  on  gasoline.  The  Russians  owned  hundreds  of  gas  stations 
and  controlled  the  supply  and  distribution  of  gasoline.  We  provided  them  with  protection  they 
needed  to  maintain  a  cartel.  We  also  helped  them  set  up  corporations  to  work  the  scam. 

1 


171 


The  main  Russian  guy  working  with  our  family  was  Marat  Balagula.  Marat  was  one  of 
the  early  leaders  of  Russian  organized  crime  in  Brooklyn.  He  made  millions  off  the  gas  tax 
business  and  our  family  made  a  lot  of  money  with  him. 

In  aroimd  late  1 986,  another  Russian  named  Vladimir,  whose  last  name  I  did  not  know  at 
the  time,  came  up  to  Marat  in  a  Russian  restaurant  in  Brighton  Beach.  Vladimir  had  recently 
arrived  in  Brighton  Beach  from  Russia.  According  to  the  Russians,  the  word  on  the  street  was 
that  he  was  a  tough  guy  with  his  own  crew.  Marat  told  me  Vladimir  pulled  a  gun,  put  it  next  to 
Marat's  head,  told  Marat  that  he  was  his  new  partner,  and  demanded  Marat  pay  him  $600,000  or 
Marat  would  be  dead. 

Marat  reached  out  to  us  and  told  us  what  happened.  We  agreed  to  meet  the  next  day. 
When  we  went  to  Marat's  house,  we  found  out  that  he  was  so  scared  that  he  had  a  heart  attack 
but  did  not  want  to  go  to  the  hospital.  I  remember  seeing  Marat  in  bed  hooked  up  to  all  kinds  of 
machines,  refusing  his  doctor's  orders  to  go  to  the  hospital.  Marat's  guy  wanted  us  to  kill 
Vladimir. 

Since  Marat  was  with  our  family  and  especially  since  he  was  such  a  money-maker  for  us, 
this  was  not  just  a  threat  against  Marat.  This  was  a  threat  against  the  Lucchese  family  as  well. 
We  knew  what  we  had  to  do.  Vic  and  I  agreed  that  Vladimir  had  to  be  killed.  We  took  this 
situation  to  Christy  Tick,  who  agreed  we  could  have  Vladimir  killed.  Vic  gave  the  hit  to  Joey 
Testa. 

We  asked  Marat  and  one  of  his  guys  to  get  us  some  information  to  identify  Vladimir. 
One  of  Marat's  guys  got  us  his  picture  and  license  plate  number.  We  had  Marat  call  Vladimir 
and  arrange  to  have  lunch  with  him  at  the  same  Russian  restaurant  in  Brighton  Beach  where 
Marat  was  threatened.  After  leaving  the  restaurant,  Vladimir  was  shot  and  killed. 

I  heard  about  the  murder  on  the  radio.  Marat  was  very  thankful  that  we  had  gotten  rid  of 
his  problem.  We  couldn't  let  somebody  try  to  put  the  squeeze  on  one  of  our  family's  big  money 
makers.  After  that,  Marat  did  not  have  any  more  problems  from  any  other  Russians. 

I  found  the  Russian  organized  crime  groups  to  be  very  clever.  We  knew  the  Russians 
were  involved  in  heroin  trafficking,  as  well  as  complicated  scams  involving  forgery,  and  tax 
evasion  in  the  oil  and  gas  business.  The  Russians  were  also  willing  to  use  violence  to  achieve 
their  goals. 

I  will  be  happy  to  answer  any  questions  you  have  about  my  knowledge  of  Russian 
organized  crime. 


172 
STATEMENT  OF  ANONYMOUS  RUSSIAN  CRIMINAL 

Chairman  Roth,  members  of  the  Subcommittee,  good  afternoon. 

I  have  been  asked  to  testify  today  about  Russian  organized  crime  in  the 
United  States,  a  problem  which  exists  in  several  cities  and  is  likely  to  grow.  Let 
me  explain  the  two  reasons  why  I  am  able  to  speak  on  this  subject.  First,  I  grew  up 
in  Russia  with  people  who  are  now  leaders  of  criminal  groups  worldwide, 
including  here  in  the  United  States.  My  father  was  a  high-ranking  officer  in  the 
Soviet  military,  and  so,  as  a  boy,  I  attended  the  best  schools  and  socialized  with 
the  communist  party  elite.  My  classmates  included  many  future  politicians  and 
criminal  leaders. 

Second,  since  1992  I  have  lived  in  the  United  States  and  know  many  of  the 
Russian  criminals  who  have  settled  here.  Some  of  these  men  --  such  as  Leonid 
Zuza  and  Vyacheslav  Kirillovich  Ivankov,  or,  "Yaponchik"  —  might  be  familiar  to 
you.  They  are  to  me.  What  you  have  to  understand  is  that  the  well-to-do  Russian 
community  in  this  countr>  is  rather  small,  and  that  the  successftil  Russian  criminals 
arepart  of  it. 


173 

Through  my  business  and  social  contacts,  I  was  a  part  of  this  community. 
But  I  have  been  in  prison  for  the  past  year.  I  am  serving  a  sentence  for  the 
possession  of  a  firearm,  which  violated  the  terms  of  my  probation  agreement.  I  am 
testifying  behind  this  screen  today  because  I  believe  that,  if  my  identity  were 
known,  I  or  my  family  might  be  killed. 

To  understand  Russian  organized  crime  in  this  country,  you  must  first 
appreciate  the  situation  in  Russia.  For  the  two  years  prior  to  my  arrival  in  the 
United  States,  I  set  up  and  ran  the  Moscow  branch  of  an  American  corporation 
specializing  in  investments  and  international  trade.  We  had  a  beautiful  office  three 
minutes  fi-om  Red  Square.  Now  there  are  two  things  you  must  do  to  operate  a 
business  successfully  in  Moscow.  First,  you  must  pay  the  right  government 
officials  under  the  table.  Because  I  had  knovm  officials  in  Moscow  since  I  was  a 
child,  figuring  out  whom  to  pay  was  simple.  To  set  up  our  office  so  close  to  Red 
Square,  I  had  to  pay  money  to  the  chief  of  government  property  in  Moscow.  Later, 
when  we  wanted  to  open  a  supermarket  in  Moscow,  I  paid  cash  to  the  mayor  of 
Moscow,  Yuri  Luzhkov. 

The  second  thing  you  must  do  to  run  a  successful  business  is  purchase  a 


174 

krisha,  literally  "roof  in  Russian,  which  has  come  to  mean  protection.  The  more 
important  you  are,  the  higher  the  roof  must  be.  In  Moscow,  organized  crime 
provides  the  roof.  Back  in  1990, 1  could  pay  one  organized  crime  group  say,  ten  to 
twenty  percent  of  our  profits,  and  it  would  make  sure  I  didn't  have  trouble  with 
any  other  groups.  There  was  crime,  but  at  least  it  was  orderly.  Leaders  of  the 
major  organized  crime  groups  in  Moscow  would  meet  regularly  to  divide  up 
opportunities.  But  as  time  went  on,  things  got  out  of  control.  Fighting  broke  out 
among  the  organized  crime  groups  in  Moscow  and  several  of  the  leaders  were 
assassinated.  Otari  Kvantrishvili,  at  that  time  the  most  powerful  organized  crime 
figure  in  Moscow  and  a  friend  of  mine,  was  the  first  to  be  killed.  Several  others 
followed.  Most  of  these  men  were  vory  v  zakone,  a  title  reserved  for  powerful 
Russian  godfathers. 

As  I  said,  things  got  out  of  control.  I  didn't  know  which  roofs  to  pay  and 
which  were  safe  to  ignore.  Men  were  showing  up  regularly  and  demanding 
protection  money.  I  came  to  the  United  States  to  escape  this  turmoil.  And  I  can 
tell  you,  many  criminals  have  as  well.  Some  are  thugs  who  worked  as  enforcers  or 
muscle  in  criminal  groups  based  in  Russia.  These  men  are  responsible  for  much  of 
the  violence  that  has  taken  place  in  Brighton  Beach  and  other  communities  where 


175 

Russians  are  concentrated  in  this  country.  These  men  are  also  disorganized  and 
looking  for  a  leader  to  devise  a  profitable  criminal  venture;  someone  like  Ivankov. 
These  are  dangerous  men,  but  would  be  far  more  so  behind  a  clever  leader. 

There  is  a  difference  between  the  Russian  criminal  who  immigrates  to  the 
United  States  today  and  the  one  who  came  in  the  1970s  and  80s.  Fifteen  years  ago, 
Russian  immigrant  criminals  were,  on  the  whole,  smarter  than  today's  lot.  The 
schemes  they  executed  —  Balagula's  fuel  tax  evasion,  the  medical  insurance  fraud 
of  the  Smushkevich  brothers  -  made  them  millionaires.  As  I  said  before,  most  of 
the  current  wave  of  Russian  criminals  is  more  prone  to  violence,  but  less 
resourceful  than  their  predecessors.  Whether  or  not  they  left  Russia  with  money  ~ 
they  will  run  out.  And  they  will  be  looking  for  ways  to  make  more. 

Russian  organized  crime  in  this  country  includes  criminals  from  both 
immigrant  waves.  They  are  involved  in  a  number  of  illegal  activities,  many  of 
which  I  understand  you  have  heard  about  earlier  today.  These  range  from  money 
laundering  to  extortion  to  car  theft  to  drug  smuggling  to  insurance  and  gas  tax 
fraud  to  murder.  Some  of  these  crimes  I  know  about  specifically. 


176 

For  example,  I  know  of  Russian  criminals  in  this  country  who  ship  guns  and 
cocaine  back  to  Russia.  These  men  have  beautiful  offices  in  Rockefeller  Center 
and  Beverly  Hills  and  look  like  legitimate  businessmen.  They  run  import-export 
busmesses  funded  by  the  mafia  over  in  Moscow.  Much  of  what  they  trade  in  is 
legal,  but  much  is  also  illegal.  For  instance,  they  purchase  cocaine  in  the  United 
States  for  twenty  to  thirty  dollars  a  gram  and  sell  it  in  Moscow  for  one  hundred  to 
one-hundred  fifty  dollars.  In  Moscow,  cocaine  is  a  habit  of  the  very  rich,  which 
means  only  three  types  of  people  can  afford  it:  newly-rich  businessmen  and 
politicians;  prostitutes;  and  criminals. 

I  know  of  murders,  as  well.  I  knew  Oleg  Koratayev,  the  famous  Russian 
boxer  who  was  shot  and  killed  in  Brighton  Beach  outside  the  Arbat  restaurant.  I 
know  also  that,  in  the  summer  of  1994,  Leonid  Zuza  ordered  the  murder  of  another 
ex-boxer  named  "Dmitry"  because  he  refused  to  pay  Zuza  $17,000  he  owed  him. 
The  killer,  a  Russian  named  "Vladimir"  who  worked  for  Zuza,  shot  Dmitry  on  a 
patio  outside  a  cafe  on  Melrose  Avenue  in  Los  Angeles. 

I  also  know  about  extortion,  which  Russian  criminals  practice  all  over  the 
world,  mainly  on  fellow  Russians.  I  myself  was  approached  by  a  group  of  Russian 


177 

criminals.  They  showed  me  pictures  of  my  family.  They  did  not  have  to  tell  me 
why.  What  they  meant  was,  if  I  did  not  pay  them  money,  my  family  would  be 
harmed  or  killed.  They  demanded  tens  of  thousands  of  dollars.  The  leader  of  the 
group  came  to  my  house  one  night  to  collect  this  money  from  me,  but  I  had  a 
shotgun  and  he  chose  to  leave. 

Professional  hockey  players  from  the  former  Soviet  Union  are  also  victims 
of  extortion.  And  the  extortion  does  not  just  happen  in  Moscow  or  Kiev,  it 
happens  here.  Alexander  Mogilny,  who  plays  for  the  Vancouver  Canucks,  was 
threatened  by  Sergei  Fomichev,  a  man  I  know.  Fomichev  had  helped  Mogilny 
come  to  this  country.  A  couple  of  years  ago  Fomichev  came  to  Mogilny, 
threatened  him  and  demanded  money.  Mogilny  was  scared  and  went  to  the  police 
who  caught  Fomichev  before  anything  happened.  Fomichev  has  ties  to  Russian 
organized  crime  groups. 

Often,  when  a  Russian  criminal  demands  money  the  threat  is  not  explicit. 
But  it  is  clearly  understood.  Alexei  Zhitnick,  a  defenseman  for  the  Buffalo  Sabres, 
used  to  play  for  the  Los  Angeles  Kings.  He  showed  up  at  a  Russian  club  in  Los 

Angeles  one  night  with  a  new  car,  expensive  clothes  and  beautiftil  women.  He  was 


178 

young  and  naive.  A  man  named  Sasha,  whom  I  know  is  connected  with  a  Russian 
criminal  group,  approached  Alexei  and  demanded  money  from  him.  Sasha  was 
sending  Alexei  a  warning,  to  make  sure  he  thought  about  his  future  in  Los  Angeles. 
Alexei  did  not  go  to  the  police.  Instead  he  went  to  a  more  powerful  criminal  group 
to  take  care  of  the  problem  for  him,  which  I  understand  it  did. 

I  also  know  Vladimir  Malakhov,  who  plays  for  the  Montreal  Canadiens  but 
used  to  be  with  the  New  York  Islanders.  He  was  approached  in  the  National 
restaurant  in  Brighton  Beach  by  a  man  who  worked  for  Ivankov.  The  man 
demanded  money  from  Malakhov.  He  didn't  have  to  threaten  him  explicitly;  the 
message  was  clearly  understood.  Malakhov  spent  the  next  months  in  fear,  looking 
over  his  shoulder  to  see  if  he  was  being  followed,  avoiding  restaurants  and  clubs 
where  Russian  criminals  hang  out.  Fortunately,  the  problem  went  away  when 
Malakhov  was  traded  to  Montreal. 

These  are  just  a  few  stories  to  illustrate  the  illegal  activities  of  Russian 
organized  crime  in  the  United  States.  What  we  have  here  cannot  compare  to  the 
criminal  activity  and  structure  in  Russia.  But  what  we  have  here  is  a  problem  that 
is  growing.  Just  last  week  I  heard  that  another  vor>'  v  zakone,  or  Russian 
godfather,  recently  arrived  in  the  United  States.  As  I  said,  when  leaders  arrive  the 
problems  will  multiply. 

I  am  happy  to  answer  your  questions. 


179 


Testimony  of  Detectives  Daniel  Mackey  and  Ralph  Cefareilo  before  the 

Permanent  Subcommittee  on  investigations 

May  15,  1996 

Good  morning.  Chairman  Roth,  Senator  Nunn  and  members  of  the 
Permanent  Subcommittee  on  Investigations.  My  name  is  Detective  Daniel 
Mackey  of  the  New  York  City  Police  Department.  On  behalf  of  myself  and 
my  colleague,  Detective  Ralph  Cefareilo,  thank  you  for  this  opportunity  to 
testify  about  Russian/Eurasian  criminals  operating  in  New  York  City  and 
what  is  being  done  to  stop  them. 

Previous  speakers  have  given  you  international  and  national  perspectives. 
Our  view  of  this  most  serious  crime  problem  is  that  of  working  detectives, 
catching  cases  involving  suspects  and,  quite  often,  victims  who  were  born 
in  the  former  Soviet  Union. 

I  work  in  a  precinct  detective  squad  that  covers  Brighton  Beach,  Brooklyn. 
Since  the  late  1970s,  Brighton  has  become  home  to  an  ever-growing 
number  of  Russian-speaking  immigrants  from  a  variety  of  former  Soviet 
Republics,  including  Georgia,  Azerbaijan  and  Chechen.  The  great  majority 
are  hard  working,  law-abiding  citizens  who  have  revitalized  a  neighborhood 
that  has  come  to  be  known  as  "Littie  Odessa."  Brighton  Beach  Avenue  is 
lined  with  thriving  markets,  restaurants,  nightclubs,  clothing  and  video 
stores  that  all  cater  to  Russian-speaking  customers.  It  is  possible  to  go 
about  your  daily  business  in  Brighton  without  uttering  or  reading  one  word 
of  English. 

Unfortunately,  Brighton  is  also  a  hub  for  Russian-born  criminals  with  a 
well-deserved  reputation  for  extreme  violence.  Their  criminal  activities 
include  vicious  murders  and  assaults,  extortion  of  Russian-owned 
businesses,  prostitution,  illegal  gambling  and  a  vast  collection  of  frauds 
and  schemes  that  ravage  the  economy,  costing  government,  businesses 
and  consumers  millions. 

We  have  encountered  staged  motor  vehicle  accidents  in  which  all 
participants  claim  back  and  neck  injuries,  then  file  insurance  claims  for 
medical  services  provided  by  Russian-operated  medical  groups  also 
believed  to  be  in  on  the  scam.  We  have,  in  joint  operations  v^th  the  United 
States  Secret  Service,  dismantied  sizable  cellular  phone-cloning  networks 
run  by  Russian/Eurasian  nationals. 


180 


While  we  have  had  some  success,  it  is  often  difficult  and,  frankly,  quite 
frustrating,  to  investigate  these  illegal  activities  —  for  the  same  reasons  it 
has  always  been  difficult  and  frustrating  to  investigate  crimes  committed 
within  a  close-knit  immigrant  community.  To  a  large  extent,  the  criminals 
count  on  language  as  a  barrier,  as  well  as  a  presumed  reluctance  on  the 
part  of  fellow  immigrants  to  cooperate  with  police  —  especially  if  the  police 
in  their  homeland  were  viewed  as  agents  of  an  oppressive  regime. 

The  NYPD  has  relatively  few  police  officers  and  investigators  who  are 
fluent  in  Russian.  The  language  barrier  may  hinder  an  investigation  in 
several  ways:  the  first  officers  or  detectives  to  arrive  at  a  crime  scene  may 
have  to  scramble  for  translators.  And,  ifs  tougher  to  field  traditional 
undercover  operations  used  in  public  morals  cases. 

For  example,  Russian-run  brothels  are  extremely  lucrative,  but  do  not 
cater  to  non-Russian  clients.  We  have  attempted  to  use  undercover 
"Johns"  who  do  speak  Russian,  but  even  they  require  an  introduction 
from  a  credible  go-between,    which  has  proven  difficult  to  obtain. 

We  have  investigated  numerous  cases  involving  the  extortion  of  Russian- 
owned  businesses,  sometimes  referred  to  as  "window  insurance."  It  is  not 
uncommon  for  complainants  in  these  cases  to  cooperate  only  up  until  the 
time  an  arrest  is  made,  then  refuse  to  follow  through  on  the  prosecution. 

When  the  crime  is  murder,  witnesses  willing  to  cooperate  are  also  scarce. 
At  this  time,  I'd  like  to  introduce  Detective  Cefarello,  who  will  provide  a 
brief  overview  of  our  experience  with  murder  investigations  of  Russian 
crime  figures. 

Good  morning.  My  name  is  Detective  Ralph  Cefarello.  I  am  currentiy 
assigned  to  a  new  citywide  investigative  unit  specifically  created  to 
combat  the  criminal  activity  you  are  hearing  about  today. 

In  the  past  15  years,  there  have  been  a  total  of  42  murders  and  24 
attempted  murders  in  New  York  City  knov«m  to  be  linked  to 
Russian/Eurasian  criminal  organizations.  Many  of  the  murder  victims 
served  time  in  prison  in  the  former  Soviet  Union  or  were  known  to  engage 
in  criminal  activity  there;  several  were  accomplished  athletes  in  contact 
sports  such  as  vt^estiing,  boxing,  or  one  of  the  martial  arts.  Commonly,  the 
motives  for  these  murders  involved  disputes  over  profits  from  illegal 
activities  and  turf  battles  over  extortion  rights. 

Witnesses  in  these  cases  were  often  less  than  forthcoming.  Take,  for 
example,  the  murder  in  Brooklyn  of  a  former  Soviet  heavyweight  champion. 
This  individual,  who  was  involved  in  strong-arm  extortions  and  narcotics 


181 


trafficking,  was  shot  and  killed  in  front  of  a  Russian  nightclub  on  Brighton 
Beach  Avenue.  He  had  been  among  some  75  guests  at  a  private  party.  His 
killer  had  also  been  present  during  the  festivities.  We  talked  to  everyone 
who  had  been  present  at  the  party.  The  story  was  the  same,  interview  after 
interview.  No  one  saw  or  heard  anything.  No  one  could  identify  the  victim. 
No  one  could  identify  his  killer. 

Despite,  these  types  of  investigative  obstacles  we've  been  able  to  clear  15 
of  these  42  homicides  and  we  expect  to  prosecute  those  responsible  for 
numerous  other  murders  pursuant  to  active  RICO  investigations  with 
federal  prosecutors. 

It  is  important  to  note  that  cooperation  among  local,  state  and  federal  law 
enforcement  agencies  remains  an  essential  ingredient  of  any  successful 
strategy  to  address  this  problem.  NYPD  detectives  meet  regularly  with 
representatives  of  other  agencies;  these  information-sharing  sessions 
have  proven  quite  productive. 

Finally,  thank  you  for  your  interest  in  a  crime  problem  we  are  working  so 
hard  to  eradicate.  We  already  enjoy  the  leadership  and  support  of  Mayor 
Rudolph  W.  Giuliani  and  Police  Commissioner  Howard  Safir.  Any  additional 
federal  resources  you  could  send  our  way  would  be  greatly  appreciated 
and  well  used  to  permanently  stunt  the  growth  of  Russian  organized 
criminal  activity  on  our  shores. 


25-049  0-96-7 


182 


WRITTEN  STATEMENT  OF  DETECTFVE  BILL  POLLARD 

KAJiCUTIVS  STTMMARY 

The  demise  of  the  Soviet  empire  and  the  opening  of  the  borders  to 
the  West  have  kindled  new  incentives  and  opportunities  for 
organized  crime  in  the  newly  independent  states  of  the  Former 
Soviet  union  (FSU) .   The  explosive  growth  of  organized  crime  in 
the  FSU  represents  a  significant  threat  to  the  United  States. 
These  syndicates  are  playing  an  increasing  role  in  the  global 
trafficking  in  illicit  drugs  and  are  exporting  their  operations 
and  networks  and  collaborating  with  foreign  criminal 
organizations.   These  developments  pose  a  serious  challenge  to 
law  enforcement  agencies  within  the  United  States. 

As  Russian  crime  syndicates  move  westward  and  collaborate  with 
foreign  criminal  syndicates,  the  predictable  results  occur  -- 
increases  in  homicides,  racketeering,  major  frauds,  extortion  and 
kidnappings.   These  crimes  are  occurring  all  too  frequently 
within  the  Russian/Armenian  ethnic  communities. 

The  greater  Los  Angeles  area  is  particularly  impacted  by  the 
activities  of  Russian  criminal  organizations.   This  area  has  the 
second  largest  Russian  population  outside  of  Russia. 

Not  surprisingly,  law  enforcement's  efforts  to  investigate  these 
crimes  are  hampered  by:   a  mistrust  of  the  police  within  the 
Russian/Armenian  community;  an  insufficient  number  of  qualified 
interpreters;  and  fear  of  reprisal  if  information  is  provided  to 
the  police. 


183 


To  better  understand  the  magnitude  of  the  problem  of  Russian 
orgamized  crime  (ROC)  in  1996,  it  is  necessary  to  understand  the 
recent  migration  of  criminals  from  the  countries  of  the  former 
Soviet  Union  (FSU) .   During  the  1970's  and  1980's,  the  FSO 
allowed  only  about  200,000  Soviet  citizens  to  migrate  to  the 
United  States.   The  majority  were  Russian- Jewish  refugees. 
However,  it  is  well  recognized  that  the  FSU  used  this  opportunity 
to  "encourage"  migration  of  hardcore  criminals.   It  is  believed 
that  many  KGB  agents  also  were  part  of  the  migration  from  the 
FSU.   The  emigre  population  settled  primarily  in  the  New  York 
Brighton  Beach  area  and  secondarily  in  the  Los  Angeles  sorea  of 
California. 

Between  the  1989  Lautenberg  Amendment  and  the  mid-1990' s  (five 
years) ,  immigration  from  the  FSU  has  far  surpassed  the  total  of 
those  immigrating  the  previous  20  years.   A  small  percentage  of 
those  emigres  have  continued  to  be  criminals  who  enter  with  false 
passports  and  fraudulent  visas . 

The  Los  Angeles  Police  Department  began  to  identify  and  track  a 
few  associated  criminal  members  of  the  FSU  community  in  the  early 
1980 's  as  preparations  were  being  made  to  host  the  1984  Olympic 
Games.   Since  the  Olympics,  the  number  of  targeted  ROC  criminals 
has  steadily  increased.   These  groups  have  become  increasingly 
violent  in  the  pursuit  of  illicit  gain. 


184 


While  these  groups  predominately  prey  on  those  within  their  own 
ethnic  community,  their  criminal  enterprises  have  increasingly 
become  more  complex.   Medical  fraud  and  gas  excise  tax  fraud  are 
two  areas  that  have  been  targeted  by  these  criminal  syndicates. 
These  frauds  are  difficult  to  investigate  and  difficult  to 
prosecute.   Local  law  enforcement  agencies  lack  the  resources  to 
properly  investigate  these  crimes,  yet  these  schemes  cost  the  tax 
payer  millions  of  dollars  in  lost  revenue  or  in  excess  ins\irance 
premiums. 

Law  enforcement  in  the  Los  Angeles  area  has  responded  to  the 
threat  of  Russian  organized  crime  by  exchanging  investigative 
leads  and  general  information  in  order  to  track  their  criminal 
p\irsuits.   In  1991,  detectives  from  the  Los  Angeles  Police 
Department's  Organized  Crime  Intelligence  Division  and  the 
Los  Angeles  County  Sheriff's  Department  organized  a  regional 
meeting  of  law  enforcement  professionals.   The  group  of 
investigators  became  known  as  the  Soviet  Organized  Crime 
Intelligence  Team  (SOCIT) .   The  Southern  California  group,  which 
meets  monthly,  has  grown  to  include  investigators  state -wide,  as 
well  as  federal  law  enforcement  agents. 

There  are  many  obstacles  facing  law  enforcement  as  they  battle 
ROC.   Communication  links  need  to  be  improved  within  the  state 
and  national  boundaries.   Improved  cooperation  and  communications 
between  the  United  States  and  other  victim  countries  should  be 
actively  explored.   The  problem  is  not  solely  a  United  States/FSU 
issue.   Russian  organized  crime  syndicates  have  increased 
alarmingly  in  the  past  five  years.   Their  influence  extends 
throughout  Europe  and  North  America.   We  are  all  becoming  victims 
amd  we  must  work  together.   Unfortunately,  responsibility  for 
many  of  these  issues  is  currently  fragmented  among  different 
federal  offices  and  bureaus.   The  United  States  will  need  to 
redefine  its  organizational  responses  to  cope  with  the  complex 
challenge  arising  from  FSU  crime  groups. 


185 


IKTROPnCTIOK 

This  document  was  prepared  by  the  Los  Angeles  Police  Depau-tment ' 3 
Organized  Crime  Incelligence  Division  to  be  presented  in 
conjunction  with  testimony  before  the  United  States  Senate 
Perroanent  Subcoramittee  on  Investigations,  Coiranittee  on 
Governmental  Affairs,  chaired  by  Senator  William  V.  Roth,  Jr. 
The  purpose  of  this  paper  is  to  discuss  the  impact  of  Russiam 
organized  crime  (ROC)  on  the  Los  Angeles,  California,  area  and  to 
provide  specific  examples  of  ROC  criminal  activity.   It  is 
important  to  include  a  limited  history  in  order  to  better 
understand  the  development  and  continued  growth  of  Russian 
organized  crime  syndicates  which  are  of  particular  concern  to  the 
Los  Angeles  Police  Department  as  well  as  other  California  law 
enforcement  agencies. 

HISTORY 

The  term  Russian  organized  crime  will  be  used  to  describe  the 
various  criminal  groups  whose  members  come  from  and/or  have  ties 
to  Che  former  Soviet  Union  (FSU) .   These  republics  include  more 
than  150  ethnic  backgrounds  where  approximately  120  languages  and 
dialects  are  spoken  with  the  Russian  language  being  a  common  tie. 

During  the  1970 's  and  1980 's,  the  FSU  relaxed  its  immigration 
policy,  allowing  approximately  200,000  Soviet  citizens  to 
immigrate  to  the  U.iited  states.   The  majority  of  these  emigres 
were  Russian- Jewish  refugees.   However,  it  is  widely  believed 


186 


that  these  emigres  included  some  2,000  professional  criminals  who 
had  been  released  from  FSU  prisons.   It  is  further  believed  that 
a  number  of  former  KGB  agents  also  emigrated  to  the  Onited 
States. 

The  Iciryest  concentration  of  these  emigres  settled  in  the  ' 
Brighton  Beach  area  of  New  York  with  the  next  highest 
concentration  settling  in  the  Los  Angeles  area  of  California. 

In  1989,  the  Lautenberg  Amendment  was  enacted  which  allowed  up  to 
50,000  PSU  emigres  to  enter  the  United  States  each  year.   This 
was  followed  by  the  Russian  Parliament  allowing  its  citizens  Co 
immigrate  and  travel  freely.   In  1991,  the  United  States 
experienced  a  surge  of  emigres  nearly  equaling  the  period  of  1981 
throughout  1989.   These  emigres  continued  to  primarily  settle  in 
New  York  followed  by  California. 

In  addition  to  the  legal  emigres,  many  others  entered  the 
United  States  on  Non-Immigrant  Visas  and  forged  documents.   Many 
emigres  also  misused  the  L-1  Visa  for  business  or  alleged 
business  purposes  to  gain  entry.   Investigations  revealed  that 
shell  businesses  and,  many  times,  businesses  which  were 
manipulated  or  charging  significant  fees,  sent  letters  to  the 
United  States  Embassy  sponsoring  individuals  and  requesting  visas 
be  issued.   As  the  number  of  FSU  emigres  increased,  so  did  the 
ROC  problem. 


187 


The  early  development  of  ROC  in  the  United  States  can  be  compared 
to  that  of  the  Italian  La  Cosa  Nostra  (LCN)  .   Aa  the  Soviet 
emigres  settled  in  concentrated  areas  due  to  family,  ethnic  and 
economic  ties,  the  criminal  elements  preyed  on  their  own. 
Typical  crimes  included  extortion,  theft,  fraud  and  prostitution 
As  the  crime  groups  grew,  so  did  the  sophistication  of  their 
crimes . 

In  the  early  1980' s,  while  conducting  threat  assessments  for  the 
upcoming  1984  Olympics,  the  Los  Angeles  Police  Department  began 
to  investigate  the  presence  of  ROC.   The  majority  of  ROC  groups 
in  Los  Angeles  were  generally  considered  to  be  loosely  structured 
criminal  networks  often  with  extensive  ties  to  other  groups 
throughout  the  United  States  and  the  PSU.   No  complex  structure 
was  identified  in  Los  Angeles,   Intelligence  information  did 
indicate  that  prior  to  the  murder  of  Evsei  Agron,  the  East  Coast 
godfather  of  the  Odessa  Mafia,  in  198 5,  he  had  made  several  trips 
to  Los  Angeles  to  expand  his  influence.   It  is  believed  that  he 
appointed  a  Los  Angeles  "Godfather"  to  resolve  disputes  among 
rival  ROC  groups . 

By  1985,  the  Los  Angeles  Police  Department '  had  identified  53 
known  Soviet  emigre  crime  group  members  living  in  the  Los  Angeles 
area  and  another  14  who  visited  and  had  ties  to  the  area.  These 
criminals  were  involved  in  murder,  extortion,  espionage,  grand 
theft,  counterfeiting,  insurance  fraud,  medical  fraud,  arson, 
robberies,  burglaries,  receiving  stolen  property,  tax  fraud. 


-  3  - 


188 


business  takeovers,  loan  sharking,  rape,  assault  wich  a  deadly 
weapon,  and  money  laundering. 

The  number  of  criminals  connected  with  ROC  has  skyrocketed  since 
the  1980' s.  The  ROC  groups  being  seen  in  Los  Angeles  today  are 
more  organized  and  have  a  broader  spectrum  of  criminal  activity 
than  their  predecessors.   Investigations  reveal  that  these  crime 
groups  are  now  involved  in  narcotic  trafficking,  indentured 
servitude  aind  much  more  sophisticated  financial  crimes,  medical 
amd  fuel  tax  fraud  being  the  most  common.   The  "Russian"  criminal 
today  may  come  from  Russian,  Ukraine,  Bela-Russia,  or  any  one  of 
many  other  Commonwealth  states.   He  has  forged  ties  with  crime 
groups  from  most  ethnic  backgrounds.   These  groups  include 
Israeli,  Hungarian,  and  the  traditional  Italian  mafias. 

RESPONSE  TO  THE  THREAT 

Law  enforcement  in  the  Los  Angeles  area  is  well  aware  of  the 
serious  threat  posed  by  Russian/Armenian  organized  crime  (ROC) . 
Regionally,  detectives  from  local,  state  and  federal  agencies 
have  been  responding  for  some  time  by  exchanging  investigative 
leads  and  general  information  on  these  criminals.   In  1991, 
detectives  from  the  Los  Angeles  Police  Department's  Organized 
Crime  Intelligence  Division  (OCID) ,  the  Los  Angeles  Office  of  the 
Federal  Bureau  of  Investigation,  and  the  Los  Angeles  County 
Sheriff's  Department,  organized  a  regional  meeting  of  law 
enforcement  professionals.   This  group  became  known  as  Soviet 
Organized  Crime  Intelligence  Team  (SOCIT) .   The  group  began 


189 


meeting  on  a  monthly  basis  and  drew  interested  detectives  from 
local,  state  and  federal  agencies.   The  California  Department  of 
Justice,  Bureau  of  Investigation,  has  assigned  an  analyst  to 
track  ROC  groups  throughout  California.   Periodic  intelligence 
bulletins  enable  all  California  law  enforcement  to  keep  track  of 
the  growing  menace . 

8BLECTBD  CASES  PtVOLVTNG  ROC 

In  1983 ,  Gersh  Rachmeliuk  and  Yef im  Sotsky,  Russian  organized 
crime  loan  sharks  in  Los  Angeles,  loaned  $50,000  to  a  Russian 
victim  at  a  30%  interest  rate.   Eight  years  later  (1991)  the 
victim  had  repaid  $480,000  and  still  owed  over  $120,000.   When 
the  suspects  began  threatening  the  victim  and  his  family  for 
repayment  of  the  loan,  the  victim  contacted  the  Los  Angeles 
Police  Department.   The  two  suspects  were  arrested  and 
subsequently  convicted. 

Medical  insurance  fraud  is  a  billion  dollar  business  for  Russian 
organized  crime.   Ic  involves  an  array  of  frauds  ranging  from 
staged  auto  accidents  to  false  billing  of  insxiremce  companies. 
In  1991,  one  of  the  largest  of  such  cases  was  brought  to  a 
successful  conclusion  by  federal,  state  and  local  agencies  in 
Los  Angeles.   Two  Russian  emigre  brothers,  Michael  and 
David  Smushkevich,  were  responsible  for  a  massive  fraud  scheme  in 
which  they  used  mobil  medical  laboratories  to  conduct  unnecessary 
ouid  often  fraudulent  medical  tests  on  patients.   Inflated  or 
fictitious  bills  were  sent  to  insurance  companies  resulting  in 

-  5  - 


190 


huge  illegal  fees  being  collected  by  the  brothers.   This  fraud 
eventually  spread  to  Illinois,  Missouri  and  Florida.   Authorities 
estimate  the  brothers  reaped  between  $50  and  $80  million  in 
profits. 

In  1992,  Los  Angeles  County  Sheriff's  Office  deputies  responded 
to  a  citizen's  call  concerning  a  car  left  running  in  a  private 
driveway.  When  the  deputies  knocked  on  the  door  of  the  house  in 
question,  they  were  met  by  Sergi  Ivanov,  a  Russicin  immigrant  who 
was  covered  in  blood,   upon  checking  the  house  for  the  source  of 
the  blood,  they  found  two  other  Russian  immigrants,  Andrey 
Keznetsov  and  Vladimir  Litvinenko,  murdered,  execution-style. 
They  also  found  a  second  Russian  suspect,  Alexander  Nokolaev, 
pretending  to  be  dead.   The  suspects  were  in  the  process  of 
severing  the  tips  of  the  victims'  fingers  in  an  effort  to  mask 
the  identities  of  the  victims.   The  suspects  had  also  "gutted" 
the  victims  to  recover  the  bullets  which  could  be  used  against 
them  as  evidence. 

When  questioned,  the  suspects  admitted  to  the  murders  but  claimed 
they  were  victims  themselves.   They  explained  that  the  business 
of  the  two  murder  victims  was  to  import  Russian  immigrants 
illegally  and  have  them  commit  frauds  with  checks  and  credit 
cards.   The  two  victims,  according  to  Nikolaev  and  Ivanov, 
planned  to  hold  their  passports  until  sufficient  merchandise  was 
accumulated  through  the  frauds  to  repay  the  cost  of  their  illegal 
immigration.   The  arrestees  became  tired  of  working  for  the 
deceased  and  committed  the  murder. 

-  6  - 


191 


In  1994,  Akop  Bagdasaryan,  Secrak  Nalbandi^m,  Araen  Oganeayam 
Karen  Oganesyan  and  Aram  Tsaturyan,  members  of  an  Armenian 
organized  crime  group,  were  convicted  of  kidnap/extortion  in 
Los  Angeles.   They  vere  convicted  of  kidnapping  victims  within 
their  own  Armenian  commxmity  and  threatening  to  ham  them  and 
their  families  unless  money  was  paid.   It  is  believed  this  group 
terrorized  the  Armenian  community  for  13  years. 

According  to  the  California  Department  of  Justice,  fuel  tax  fraud 
is  probably  the  most  lucrative  criminal  activity  in  the  State. 
It  is  estimated  that  the  State  of  California  is  losing  revenue 
from  excise  fuel  tax  at  the  rate  of  a  million  dollars  a  day. 
Half  of  the  money  lost  is  attributed  to  Russian  organized  crime 
groups  operating  primarily  in  the  Los  Angeles  area.   These  groups 
are  able  to  "pocket"  up  to  40  .cents  on  the  dollar  from  the  tax 
owed  to  the  state  and  federal  governments. 

These  schemes  are  accomplished  by  setting  up  shell  companies  and 
using  fraudulent  IRS  forms.   These  groups  also  rig  fuel  pumps, 
extend  fuel  by  blending  additives  such  as  transmix  or  alcohol  and 
sell  lower  grade  fuel  as  premium. 

A  federal,  state  and  local  task  force  recently  eliminated  a  major 
fuel  fraud  ring  by  arresting  25  individuals  for  various  RICO 
violations.   The  ringleader  was  identified  as  the  "godfather"  of 
the  Armenian  Mafia  in  Los  Angeles.   The  estimated  value  of 
criminal  proceeds  seized  during  this  investigation  was  over  16 
million  dollars. 


192 


This  group  sold  fuel  below  the  level  o£  legitimace  retailers 
forcing  others  out  of  business  or  requiring  them  to  join  their 
■scam"  in  order  to  survive.   Laws  have  recently  been  enacted  in 
California  to  collect  the  gas  tax  at  the  terminal  level  in  an 
effort  CO  close  this  loophole.  The  law  appears  to  be  making  am 
impact,  however,  it  is  suspected  that  the  groups  are  moving  out- 
of-state  to  get  their  fuel. 

OBSTACLES    PACjIiyG   LAW  BNFORCEMgNT 

Russian  organi2ed  crime  presents  law  enforcement  with  the 
formidable  task  of  controlling  its  rapid  expansion  and 
proliferation.   There  are  many  innate  difficulties  in  the 
invee.tigation  of  orgauiized  crime  and,  more  specifically,  ROC. 
Within  the  Russian  community  there  is  a  significemt  and  solidly 
based  fear  of  organized  crime.   Yet,  from  their  experiences  in 
the  "old  country, "  the  community  has  become  accustomed  to  dealing 
with  the  "shadow  economy."   Living  in  relatively  small  ethnic 
communities,  residents  have  no  place  to  hide.  Threats  from 
street  thugs  claiming  connection  to  well-known  "mafia"  members 
are  taken  seriously.   Commonly,  threats  are  made  against  elderly 
relatives  in  the  "old  country, "  effectively  eliminating  any 
thoughts  of  fleeing  or  turning  to  the  police  for  help.   Having  no 
control  of  matters  in  the  "old  country,"  local  immigrants  feel 
helpless. 

Law  enforcement  must  work  to  lift  this  veil  of  fear-induced 
silence.   But,  to  be  effective,  law  enforcement  must  also  address 

-  8  - 


193 


the  distrust  of  authority,  which  is  rooted  in  their  experiences 
in  the  FSU.   Without  doing  so,  it  will  become  increasingly 
difficult  to  identify  amd  target  predators  who  are  active  in 
their  neighborhoods. 

Once  identified,  ROC  targets  often  frustrate  law  enforcement's 
efforts  by  their  transient  nature.  All  too  frequently,  when  law 
enforcement  begins  to  focus  on  a  crime  group,  the  hierarchy 
moves  its  operation  to  smother  city. 

Open  communication  among  agencies  is  paramount  in  establishing 
credible  means  of  tracking  and  identifying  these  highly  mobile 
criminal  organizations.   The  exchange  of  information  must  not 
only  occur  among  local,  state  and  federal  agencies,  but  it  is 
increasingly  important  to  coordinate  the  information  flow 
internationally.   Russian  crime  groups  in  the  Los  Angeles  area 
commonly  interact  with  Russian  groups  located  in  Camada  cind  the 
former  Soviet  Union.   It  would  be  invaluable  for  local  law 
enforcement  agencies  to  have  a  reliable  source  of  identification 
and  criminal  record  information  in  the  countries  of  the  FSU. 
Persons  entering  our  borders  should  be  positively  identified  to 
facilitate  their  accurate  identification  if  they  are  arrested. 

Forged  amd  fictitious  passports  are  all  too  common.  One  of  the 
uncontrollable  aspects  of  ROC  activity  is  the  identification  of 
"Tyazhiki"  or  shadow  people  who  are  undocumented  residents  of  the 
Commonwealth  of  Independent  States  (CIS)  who  are  hired  as 
enforcers  to  travel  throughout  the  United  States  and  Europe  to 

-  9  - 


194 


commit  violent  acts,  including  murder.   Law  enforcement's  efforts 
to  identify  these  individuals  are  often  frustrated  because  no 
record  exists  of  their  entering  the  country. 

COWSIPgRATIOWS  AUD  RgCOMMENDATIONS 

The  international  nature  of  the  Russian  criminal  network  present 
a  unique  problem  to  local  law  enforcement  agencies .   By  their 
nature,  these  networks  are  ethnocentric  and  their  activities 
cross  many  jurisdictional  boundaries.   Local  law  enforcement 
agencies  lack  the  resources  to  effectively  investigate  these 
groups.   Effective  partnerships  have  begun  to  be  established  with 
federal  agencies,  but  these  agencies  often  require  a  significsmt 
threat  before  committing  limited  federal  resources.   It  is 
vitally  important  that  a  coordinated  and  concerted  effort  be  made 
to  identify  the  threat  to  the  United  States  posed  by  Russian 
organized  crime  groups,  and  to  work  cooperatively  to  investigate 
2uid  prosecute  those  involved. 

On  the  local  level,  community-based  policing  is  the  vehicle  for 
educating  the  ethnic  Russian  community  in  the  standards  and 
expectations  of  living  in  our  free  and  prosperous  society.   Open 
lines  of  communications  must  be  established  between  the  police 
and  the  community.   Trust  must  be  developed.   At  the  same  time, 
adequate  resources  must  be  expended  to  publicly  instill 
confidence  that  criminals  will  be  treated  as  criminals  and  not  be 
dealt  with  in  underground  cooperation,  as  in  the  FSU.   To  do  this 


10 


195 


effectively,  it  is  necessary  to  actively  investigate  and 
incarcerate  street  level,  as  well  as  white  collar  criminals 

On  a  regional  basis,  local,  state  cind  federal  agencies  must 
actively  pursue  open  communication.   Effective  community,  police 
and  government  planning  must  be  undertaken  now  in  order  to  stop 
the  increase  in  the  criminal  activities  of  these  Russian  crime 
groups . 

Task  force  operations  involving  local,  state  emd  federal  agencies 
are  an  effective  means  to  combat  the  growing  menace  of  Russian 
orgemized  crime  groups.  However,  the  lack  of  local  resources  may 
preclude  participation.   It  is  recommended  that  a  raeeins  be  found 
CO  augment  local  law  enforcement  budgets  when  personnel 
participate  in  a  task  force  dealing  with  cross -jurisdictional 
crimes . 

To  encourage  interagency  cooperation  and  ixiformation  flow,  a 
national  data  base  needs  to  be  established  which  could  provide 
information  to  law  enforcement  agencies  regarding  parallel 
investigations.   The  system  should  be  designed  as  a  pointer 
system  only.   The  primary  investigating  agencies  would  be 
notified  of  inquiries  regarding  subjects  involved  in  their 
investigation.   No  immediate  information  would  be  provided  to  the 
inquirer.   The  detective/agent  who  entered  the  original 
information  would  be  notified  and,  if  appropriate,  they  would 
have  the  option  of  contacting  the  inquirer. 

-  11  - 


196 


The  Iramigracion  and  Naturalization  Service  must  be  empowered  to 
expedite  the  deportation  of  repeat  criminal  offenders.   one 
Russian  source  said,  "What  are  you  going  to  do  to  us  in  this 
country  after  we  have  encountered  the  KGB  and  Gulag?  The  only 
thing  I  fear  is  deportation,  and  you  won't  do  it."  The 
unmcuiageahle  deportation  appeal  process  needs  to  be  expedited. 

In  general,  the  United  States  needs  a  new  arsenal  of 
orgcuiizational  responses  to  cope  with  the  complex  challenges 
arising  from  Russian  organized  crime  groups.  All  levels  of 
government  need  to  be  alerted  to  the  growing  problem  of  Russian 
organized  crime  within  our  borders  as  well  as  the  international 
linkages  among  organized  crime,  drug  trafficking  and  terrorism. 


197 

STATEMENT  OF 
ANONYMOUS  UNDERCOVER  POLICE  OFFICER 


SENATORS,  I  WELCOME  THE  OPPORTUNITY  TO  APPEAR  BEFORE 
YOUR  DISTINGUISHED  COMMITTEE. 

I  WAS  BORN  AND  RAISED  IN  RUSSIA.   I  EMIGRATED  FROM 
RUSSIA  TO  THE  UNITED  STATES  OF  AMERICA  IN  THE  1970 'S. 

I  HAVE  BEEN  A  LAW  ENFORCEMENT  OFFICER  FOR  MORE  THAN  TEN 
YEARS.   I  HAVE  SERVED  IN  DIFFERENT  CAPACITIES,  UNIFORMED  PATROL, 
HOMICIDE  DETECTIVE,  AND  NARCOTICS  DETECTIVE.   DURING  THE  PAST  TWO 
YEARS,  I  HAVE  BEEN  INVOLVED  IN  NUMEROUS  RUSSIAN  ORGANIZED  CRIME 
INVESTIGATIONS. 

DUE  TO  THE  FACT  THAT  I  AM  INVOLVED  IN  A  NUMBER  OF 
EXTREMELY  SENSITIVE  INVESTIGATIONS,  I  AM  TESTIFYING  ANONYMOUSLY 
IN  ORDER  NOT  TO  JEOPARDIZE  THESE  CASES  OR  THE  SAFETY  OF  OTHERS. 

AS  I  SAID  EARLIER,  I  GREW  UP  IN  THE  FORMER  SOVIET 
UNION.   I  WAS  RAISED  UNDER  THE  COMMUNIST  SYSTEM  AND  I  BELIEVE 
THAT  I  KNOW  THE  THINKING  OF  THE  PEOPLE  WHO  WERE  BROUGHT  UP  IN 
THAT  SYSTEM. 

I'M  VERY  ACTIVE  IN  THE  RUSSIAN  EMIGRE  COMMUNITY  IN  THE 
CITY  IN  WHICH  I  LIVE.   I  ATTEND  MOST  OF  THE  GATHERINGS  OF  THE 
EMIGRES  AND  CONTINUE  TO  BE  VERY  MUCH  IN  TOUCH  WITH  THE  RUSSIAN 
EMIGRES  AND  THEIR  CULTURE.   I  RECEIVE  AND  READ  MOST  OF  THE 
LITERATURE  THAT  IS  PUBLISHED  IN  THE  RUSSIAN  LANGUAGE  IN  BOTH  THE 
FORMER  SOVIET  UNION  AS  WELL  AS  HERE  IN  THE  UNITED  STATES. 

NOW  I  WOULD  LIKE  TO  TOUCH  ON  THE  SUBJECT  OF  THE 
DIFFERENCE  BETWEEN  THE  CULTURES  IN  THE  REPUBLICS  OF  THE  FORMER 
SOVIET  UNION  AND  THE  UNITED  STATES. 

GROWING  UP  IN  RUSSIA,  PEOPLE  LEARN  THE  FOLLOWING  FROM 
THEIR  PARENTS,  GRANDPARENTS,  AND  THEIR  SURROUNDINGS: 


198 


IN  ORDER  TO  SURVIVE,  THE  LESSON  IS  "SURVIVAL  OF  THE 
FITTEST." 

BY  THIS  I  MEAN  THAT  YOU  MUST  CONSTANTLY  STRUGGLE  AND 
MANIPULATE  THE  SYSTEM;  THAT  YOU  HAVE  TO  ADJUST  AND  DO  WHATEVER  IS 
NECESSARY  TO  "GET  AHEAD."   AND  THE  ENDS  JUSTIFY  THE  MEANS. 

DURING  THE  COMMUNIST  REGIME,  FOR  MANY  PEOPLE,  THE  MORAL 
VALUES  ACCEPTED  IN  A  FREE  SOCIETY  WERE  "DESTROYED,"  MAYBE  WITH  A 
FEW  EXCEPTIONS. 

RUSSIAN  PEOPLE  GREW  UP  WITH  THE  UNDERSTANDING  THAT 
STEALING  SOMETHING  FROM  THEIR  PLACE  OF  EMPLOYMENT  IS  NOT  A  CRIME. 
MAYBE  BECAUSE  ONE  WAS  NOT  STEALING  FROM  A  FRIEND  BUT  RATHER  FROM 
A  "SYSTEM." 

THEY  ALSO  GREW  UP  WITH  THE  UNDERSTANDING  THAT  THE  RULES 
WERE  MADE  TO  BE  BENT  OR  BYPASSED. 

THAT  MENTALITY,  PHILOSOPHY  AND  UPBRINGING  EXPLAINS  WHY 
SOME  OF  THE  RUSSIAN  EMIGRES,  (MANY  OF  WHOM  WERE  EDUCATED,  FAMILY 
PEOPLE)  GOT  INVOLVED  IN  WHITE  COLLAR-TYPE  CRIMINAL  ACTIVITY  HERE 
IN  THE  UNITED  STATES. 

PRIOR  TO  THE  DISINTEGRATION  OF  THE  FORMER  SOVIET  UNION 
OR  "PERESTROIKA,"   WE  DID  HAVE  A  NUMBER  OF  VIOLENT  RUSSIAN 
CRIMINALS  WHO  EMIGRATED  TO  THE  UNITED  STATES  BUT  THESE  WERE  VERY 
SMALL  IN  NUMBER. 

UP  UNTIL  "PERESTROIKA,"  THE  METHOD  BY  WHICH  "SUCCESS" 
WAS  JUDGED  IN  THE  USSR  WAS  THE  LEVEL  OF  A  PERSON'S  EDUCATION. 
DOCTORS,  ENGINEERS,  TEACHERS,  SCIENTISTS,  WERE  ALL  ACCORDED  A 
SOMEWHAT  HIGHER  STATUS  IN  SOCIETY..   WEALTH  WAS  NOT  A  FACTOR  AS  A 
WORKER  IN  A  FACTORY  WAS  MAKING  AS  MUCH  MONEY  AS  A  DOCTOR  DID. 
AND  THE  PEOPLE  WHO  DID  MAKE  MONEY  IN  THE  UNDERGROUND  ECONOMY  OR 
BLACK  MARKET  OPERATIONS  WERE  CONCEALING  THEIR  WEALTH. 


199 


AFTER  "PERESTROIKA,"  THIS  SITUATION  WAS  REVERSED  AND 
THE  WEALTHY  PEOPLE  ROSE  TO  THE  TOP  OF  SOCIETY. 

WITH  "PERESTROIKA,"  ORGANIZED  CRIME  FLOURISHED  IN 
RUSSIA. 

NOW,  I  WOULD  LIKE  TO  EXPLAIN  HOW  THESE  CRIMINAL  GROUPS 
"EMERGED."   THERE  WERE  A  NUMBER  OF  YOUNG  PEOPLE  WHO  WERE 
ENERGETIC  BUT  IMPATIENT  OR  UNABLE  TO  BUILD  UP  THEIR  OWN  BUSINESS 
OVER  A  PERIOD  OF  TIME.   THESE  PEOPLE  STARTED  TO  FORM  CRIMINAL 
GROUPS  BASED  ON  THEIR  AFFILIATIONS  WITH  NEIGHBORHOODS  OR  CITIES. 
THE  GROUPS  WERE  LED  BY  EITHER  PROFESSIONAL  CRIMINALS  OR  PEOPLE 
WITH  LEADERSHIP  ABILITIES  AND  SIMILIAR  INTERESTS.   THESE  GROUPS 
STARTED  TO  "PREY"  ON  THE  NEW  RUSSIAN  BUSINESS  SOCIETY.   THEY 
CONTINUED  TO  GROW  AND  SOME  OF  THE  CRIMINAL  ORGANIZATIONS  ARE  NOW 
SEVERAL  THOUSAND  MEMBERS  STRONG. 


THEY  WOULD  EXTORT  MONEY,  KIDNAP  PEOPLE  FOR  RANSOM,  AND 
ORGANIZED  COLLECTION  AGENCIES  WHICH  USED  VERY  UNORTHODOX  METHODS. 


ANOTHER  NEW  INDUSTRY  BEGAN  TO  EMERGE:  THAT  OF  "MURDER 
FOR  HIRE."  BUSINESS  PEOPLE  WOULD  USE  THESE  HIRED  KILLERS  TO  WIPE 
OUT  THEIR  COMPETITION  AND  THEREBY  GIVE  A  LESSON  TO  OTHERS,  "DON'T 
FOOL  AROUND  WITH  MY  COMPANY  OR  THE  AREA  THAT  I'M  OPERATING  IN." 

INFORMATION  HAS  BEEN  DEVELOPED  THAT  MANY  OF  THESE 
MURDERS  WERE  COMMITTED  IN  RUSSIA  BY  PEOPLE  WITH  EXTENSIVE 
MILITARY  BACKGROUNDS. 

THESE  ACTIONS  FORCED  THE  BUSINESS  PEOPLE  TO  EACH  BEGIN 
LOOKING  FOR  (QUOTE)  "PROTECTION"  (END-QUOTE) .   AND,  A  NEW  AND 
VERY  PROFITABLE  BUSINESS  CALLED  "KRISHA, "  MEANING  "ROOF"  IN 
ENGLISH,  CAME  INTO  BEING. 


200 


VERY  FEW  BUSINESSES  IN  RUSSIA  COULD  SURVIVE  WITHOUT 
THIS  PROTECTION.   UP  TO  FIFTY  PERCENT  OF  THEIR  INCOME  IS  DIVERTED 
BY  THE  LEGITIMATE  BUSINESSES  TO  CRIMINAL  ORGANIZATIONS  IN  RETURN 
FOR  THIS  PROTECTION. 

WITH  THE  NEW  ABILITY  TO  TRAVEL  FREELY,  WE  SEE  RUSSIAN 
CRIMINAL  ORGANIZATIONS  ESTABLISHING  THEIR  ROOTS,  THEIR  TIES,  HERE 
IN  THE  UNITED  STATES  OF  AMERICA. 

ANOTHER  IMPORTANT  POINT  IS  THAT  DURING  THE  COMMUNIST 
REGIME,  THERE  WAS,  IN  EFFECT,  A  SYSTEM  WHERE  A  PRIVILEGED  CLASS 
OP  THE  COMMUNIST  GOVERNMENT  OFFICIALS  WAS  DEVELOPED.   THERE  WAS 
ALMOST  A  "CLOSED  SOCIETY"  OF  THE  COMMUNIST  BUREAUCRACY  AND  IT  WAS 
NEARLY  IMPOSSIBLE  TO  BECOME  A  PART  OF  IT  UNLESS  ONE  WAS  WELL 
CONNECTED . 

HOWEVER,  WITH  THE  DISMANTLING  OF  THE  SOVIET  UNION, 
THESE  PEOPLE  REMAINED  IN  OFFICE,  BUT  NO  LONGER  UNDER  THE 
COMMUNIST  SYSTEM  WHICH  GUARANTEED  THEM  A  BETTER  LIFE.   THEY  BEGAN 
TO  SEE  THAT  HONEY  IS  THE  CRITERIA  ON  WHICH  PEOPLE  WERE  JUDGED. 
VET,  THEY  HAD  THE  POWER  TO  ISSUE  LICENSES,  PERMITS,  VALUABLE 
GOVERNMENT  CONTRACTS,  SET  CUSTOMS  DUTIES  ON  GOODS  IMPORTED  INTO 
THE  FORMER  SOVIET  UNION,  OR  SET  STANDARDS  FOR  THE  EXPORT  OF 
RUSSIA'S  VALUABLE  COMMODITIES,  FOR  EXAMPLE,  ITS  NATURAL 
RESOURCES . 

MANY  OF  THESE  GOVERNMENT  OFFICIALS  BEGAN  TO  TAKE 
ADVANTAGE  OF  THEIR  POSITIONS  DUE  TO  THIS  PERCEPTION.   THEY  OR 
MEMBERS  OF  THEIR  FAMILIES  BECAME  (QUOTE)  "PARTNERS" (ENDQUOTE)  IN 
BUSINESS  ENTERPRISES  OR,  IN  EFFECT,  "SOLD"  THEIR  POWER  AND 
AUTHORITY. 

INFORMATION  DEVELOPED  SHOWS  THAT  MANY  RUSSIAN 
GOVERNMENT  OFFICIALS,  WORKING  ON  A  MODEST  SALARY,  AMASSED  VAST 
SUMS  IN  THIS  FASHION.   THESE  SAME  CORRUPT  OFFICIALS  PUT  THE 
PROFITS  FROM  THIS  ACTIVITY  IN  BANK  ACCOUNTS  ALL  OVER  THE  WORLD 
AND  PURCHASE  REAL  ESTATE  OR  OTHER  PROPERTY  IN  VARIOUS  COUNTRIES 
INCLUDING  THE  UNITED  STATES  OF  AMERICA. 


201 


IN  ADDITION,  MANY  OF  THE  FORMER  INTELLIGENCE,  LAW 
ENFORCEMENT,  AGENTS  AND  LEADERS  PERCEIVED  THAT  THEY  WERE  "ON  THE 
BOTTOM"  SO  TO  SPEAK,  OF  THE  NEW  AND  EMERGING  WEALTHY  RUSSIAN 
SOCIETY.   THEIR  SERVICES  AND  KNOWLEDGE  BECAME  A  VALUABLE 
COMMODITY  TO  THE  EMERGING  CRIMINAL  GROUPS. 

IN  SPEAKING  WITH  A  NUMBER  OF  SOURCES  OF  INFORMATION 
OVER  THE  PAST  COUPLE  OF  YEARS,  I  HAVE  LEARNED  THAT  INDIVIDUALS 
AND  BUSINESSES  AFFILIATED  WITH  THE  FORMER  SOVIET  INTELLIGENCE 
ORGANIZATIONS  ARE  BEING  USED  BY  THE  RUSSIAN  ORGANIZED  CRIME 
GROUPS  ALL  OVER  THE  WORLD,  INCLUDING  THE  UNITED  STATES.   WHILE  I 
CANNOT  GO  INTO  THE  SPECIFICS  OF  THIS,  I  CAN  SAY  THAT  THE 
INFORMATION  DEVELOPED  SHOWS  THAT  THE  FORMER  INTELLIGENCE  OFFICERS 
ARE  WORKING  IN  LEAGUE  WITH  RUSSIAN  ORGANIZED  CRIME  AND  MAKING 
HUGE  PROFITS  IN  THE  PROCESS. 

AMONG  THE  STRONGEST  RUSSIAN  CRIMINAL  ORGANIZATIONS 
WHICH  ARE  OPERATING  TODAY  ARE  THE  FOLLOWING  GROUPS: 

1.  IZMAILOVSKAYA  ORGANIZATION.   THIS  IS  BASED  IN 
MOSCOW  AND  IS  SEVERAL  THOUSAND  MEMBERS  STRONG.  ITS  LEADERS  RESIDE 
IN  RUSSIA  AND  ISRAEL.  THE  GROUP  USES  QUASI -MILITARY  RANKS  AND  IS 
VERY  STRICT  IN  DISCIPLINING  ITS  MEMBERS.   IT  IS  INVOLVED 
EXTENSIVELY  IN  MURDER-FOR-HIRE,  EXTORTIONS  AND  INFILTRATION  OF 
LEGITIMATE  BUSINESSES. 

2.  SOLNTSEVSKAYA  ORGANIZATION.   THIS  IS  BASED  IN 
MOSCOW.   ITS  LEADERS  RESIDE  IN  RUSSIA,  CENTRAL  EUROPE  AND  ISRAEL. 
THE  GROUP  IS  ACTIVE  IN  EXTORTIONS,  INFILTRATION  OF  LEGITIMATE 
BUSINESSES,  COUNTERFEITING  AND  THE  TRAFFICKING  IN  ILLEGAL  DRUGS. 

3.  PODOLSKAYA  ORGANIZATION.   THIS  IS  BASED  IN  MOSCOW, 
ITS  LEADERS  RESIDE  IN  RUSSIA.   THE  GROUP  IS  ACTIVE  IN  EXTORTIONS, 
INFILTRATION  OF  LEGITIMATE  BUSINESS  AND  THE  TRAFFICKING  IN 
ILLEGAL  DRUGS. 


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OTHER  ORGANIZATIONS  INCLUDE: 

KUNTSEVSKAYA  BAIASHIKHIN  (BALASHIXHINSKAYA) 

KURGANSKAYA  BAUMANSKAYA 

MAZUTKINSKAYA  CHECHEN  CRIMINAL  ORGANIZATION  (SEVERAL  BRIGADES) 

PUSHKINSKAYA  DAGESTANI 

TAGANSKAYA  DOLGOPRUDENSKAYA 

TAMBOVSKAYA  KAZANSKAYA 

VORKUTA  » 

UNTIL  LAST  YEAR,  THERE  WAS  A  RUSSIAN  CRIMINAL 
ORGANIZATION  OPERATING  IN  THE  NEW  YORK  AREA  WHICH  WAS  HEADED  BY 
AN  INDIVIDUAL  WITH  AN  EXTENSIVE  CRIMINAL  BACKGROUND  IN  RUSSIA. 
THIS  PARTICULAR  ORGANIZATION  HAD  MEMBERS  OR  ASSOCIATES  NOT  ONLY 
IN  NEW  YORK  CITY  BUT  STRETCHED  ACROSS  THE  UNITED  STATES.   THE 
ORGANIZATION  WAS  CRIPPLED  DDE  TO  THE  RECENT  ARRESTS  OF  ITS  LEADER 
AND  SEVERAL  MEMBERS  ON  RACKETEERING  CHARGES. 

WE  HAVE  BEEN  ABLE  TO  LINK  SEVERAL  MURDERS  WHICH  HAVE 
OCCURRED  IN  THE  UNITED  STATES  TO  RUSSIAN  ORGANIZED  CRIME  GROUPS. 

DURING  THE  1980 'S  AND  1990 'S,  THE  UNITED  STATES  OF 
AMERICA  LOST  BILLIONS  OF  DOLLARS  IN  TAX  REVENUE  WHEN  RUSSIAN 
CRIMINALS  ORGANIZED  A  FUEL  TAX  SCAM.   SEVERAL  CASES  HAVE  BEEN 
SUCCESSFULLY  PROSECUTED  IN  THE  U.S.,  IN  SUCH  CITIES  AS  NEWARK, 
PHILADELPHIA,  ATLANTA  AND  NEW  YORK.   THERE  ARE  OTHERS  UNDER 
INDICTMENT  AT  THIS  TIME  IN  NEW  JERSEY  AND  LOS  ANGELES. 

THIS  CASE  ALSO  SHOWED  US  THAT  RUSSIAN  CRIMINALS  WERE 
OPEN  TO  COOPERATION  WITH  OTHER  CRIMINAL  GROUPS. 

ONE  TYPE  OF  GROUP  WITH  WHOM  THE  RUSSIAN  ORGANIZED  CRIME 
FIGURES  HAVE  WORKED  ARE  THE  ITALIAN-AMERICAN  ORGANIZED  CRIME 
"FAMILIES"  OPERATING  IN  THE  NEW  YORK-NEW  JERSEY  AREA.   IN  THIS 
PARTICULAR  INSTANCE,  THE  RUSSIAN  CRIMINALS  PAID  THE  ITALIAN- 
AMERICAN  CRIMINAL  GROUPS  A  "TAX"  AMOUNTING  TO  A  CERTAIN 
PERCENTAGE  OF  THEIR  PROFITS,  IN  RETURN  FOR  THE  ABILITY  TO  OPERATE 
IN  THE  AREAS  UNDER  THEIR  INFLUENCE  OR  CONTROL. 


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SINCE  THAT  TIME,  WE  PEVELOPED  INFORMATION  ABOUT 
CONTINUING  COOPERATION  OF  RUSSIAN  ORGANIZED  CRIME  FIGURES  WITH 
ITALIAN-AMERICAN  CRIMINAL  GROUPS. 

WE  ALSO  DEVELOPED  INFORMATION  ABOUT  INCREASING 
COOPERATION  BETWEEN  RUSSIAN  ORGANIZED  CRIME  AND  COLOMBIAN  DRUG 
CARTELS.  THE  RUSSIAN  ORGANIZED  CRIME  GROUPS  ARE  BELIEVED  TO  BE 
HEAVILV  INVOLVED  IN  THE  LAUNDERING  OF  THE  PROFITS  OF  THESE 
COLOMBIAN  DRUG  CARTELS.   THEY  HAVE  ALSO  ESTABLISHED  A  CONTINUOUS 
FLOW  OF  COCAINE  FROM  COLOMBIA  TO  EASTERN  EUROPE  AND  RUSSIA, 
IT  HAS  E:VEN  been  RECENTLY  REPORTED  IN  NEWSPAPERS  THAT  DRUG 
DEALERS  IN  COLOMBIA  ARE  USING  FORMER  SOVIET  MILITARY  TRANSPORT 
AIRCRAFT  TO  MOVE  QUANTITIES  OF  COCAINE. 

TO  DESCRIBE  A  TYPICAL  ACTIVITY  OF  RUSSIAN  ORGANIZED 
CRIME,  I  CAN  BRING  THE  FOLLOWING  EXAMPLE: 

A  HARDWORKING  RUSSIAN  BUSINESSMAN  OPERATING  IN  THE 
HEAVILY  POPXnATED  RUSSIAN  AREA  OF  A  MAJOR  CITY  IS  VISITED  BY 
SEVERAL  MALES.   THEY  TELL  THE  BUSINESSMAN  THAT  EITHER  FOR  A 
CERTAIN  PERCENTAGE  OF  HIS  BUSINESS  OR  REGULAR  PAYMENTS,  THEY  WILL 
"PROTECT"  HIS  ESTABLISHMENT. 

IF  THE  BUSINESSMAN  REPLIES  THAT  HE  DOES  NOT  FEEL  THAT 
HE  NEEDS  THAT  PROTECTION,  IN  THE  NEAR  FUTURE,  STRANGE  THINGS  WILL 
HAPPEN  TO  HIS  FAMILY  OR  HIMSELF.  ROBBERIES  MAY  TAKE  PLACE  »-HIS 
ESTABLISHMENT.  ACTS  OF  VANDALISM  WILL  OCCURR.  THREATENING  PHONE 
CALLS  WILL  BE  RECEIVED  AND/OR  VIOLENT  ACTS  AGAINST  HIM  OR  MEMBERS 
OF  HIS  FAMILY  WILL  TAKE  PLACE. 

THE  SAME  PEOPLE  WILL  VISIT  THE  BUSINESSMAN  AGAIN,  AND, 
NOW  CONVINCED  THAT  HE  DOES  NEED  PROTECTION,  THE  BUSINESSMAN  WILL 
START  PAYING. 

MANY  OF  THE  CASES  OF  WHICH  I  HAVE  KNOWLEDGE  OR  HAVE 
BEEN  PERSONALLY  INVOLVED,  ARE  CURRENTLY  UNDER  ACTIVE 
INVESTIGATION,  AND  THEREFORE  I  AM  NOT  DESCRIBING  THESE  OR 
COMMENTING  FURTHER. 


204 


SENATORS,  I  HAVE  BEEN  ASKED  BY  YOUR  STAFF  WHETHER  1 
HAVE  ANY  ADVICE  FOR  THE  COMMITTEE  ON  HOW  TO  COMBAT  RUSSIAN 
ORGANIZED  CRIME.   I  WOULD  LIKE  TO  MAKE  A  FEW  SUGGESTIONS  THAT 
MOULD  COME  NOT  ONLY  FROM  ME  BUT  FROM  LAW  ENFORCEMENT  PERSONNEL 
WITH  WHOM  I  AM  WORKING  ON  FEDERAL,  STATE  AND  LOCAL  LEVELS. 

FORMAL  TASK  FORCES  SHOULD  BE  ESTABLISHED  IN  MAJOR 
METROPOLITAN  AREAS,  CONSISTING  OF  FEDERAL,  STATE  AND  LOCAL 
OFFICERS.   WHAT  THESE  TASK  FORCES  COULD  DO  IS  ACTIVELY  GATHER 
INFORMATION  ABOUT  RUSSIAN  ORGANIZED  CRIME  ACTIVITY  IN  THEIR 
CITIES,  AND  CONDUCT  INVESTIGATIONS  AGAINST  THESE  SUBJECTS.   THE 
TASK  FORCES  SHOULD  ESTABLISH  LIAISON  CONTACTS  WITH  LAW 
ENFORCEMENT  AGENCIES  THROUGHOUT  THE  WORLD,  SINCE  RUSSIAN 
ORGANIZED  CRIME  GROUPS  OPERATE  ON  A  GLOBAL  SCALE. 

ONE  OF  THE  MOST  GLARING  GAPS  IN  THE  FIGHT  AGAINST 
RUSSIAN  ORGANIZED  CRIME  IS  THE  LACK  OF  AN  EXTRADITION  TREATY 
BETWEEN  THE  UNITED  STATES  OF  AMERICA  AND  THE  FORMER  SOVIET 
REPUBLICS.   THIS  HAS  ENABLED  MANY  RUSSIAN  CRIMINALS,  ASSOCIATED 
WITH  ORGANIZED  CRIME  AND  SOUGHT  AS  FUGITIVES  BY  RUSSIAN 
AUTHORITIES,  TO  SEEK  REFUGE  IN  THE  UNITED  STATES.   BY  THE  SAME 
TOKEN,  RUSSIAN  CRIMINALS  WHO  HAVE  BEEN  COMMITTING  CRIMES  IN  THE 
UNITED  STATES  HAVE  SUBSEQUENTLY  LEFT  FOR  RUSSIA  AND  FOUND  SAFE 
HAVEN  THERE. 

WHAT  COULD  BE  ACCOMPLISHED  BY  ADDRESSING  THESE  MATTERS, 
HOWEVER,  IS  A  "SLOWING  DOWN,"  BUT  NOT  A  COMPLETE  HALT,  TO  THE 
GROWING  PROBLEM  OF  RUSSIAN  ORGANIZED  CRIME  IN  THE  UNITED  STATES 
OF  AMERICA. 

THANK  YOU  FOR  THE  OPPORTUNITY  TO  APPEAR  BEFORE  YOUR 
DISTINGUISHED  COMMITTEE. 


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BOSTON  PUBLIC  LIBRARY 


3  9999  06351  780  7 


ISBN  0-16-053632-4 


780160"536328 


90000